Q4 2024 Donaldson Co Inc Earnings Call

Operator: --full-year 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you.

Speaker Change: Thank you for standing by and welcome to the Donalson Company 4th quarter and full year 2024 earnings conference call. All lines have been placed on mute to prevent any background noise.

Speaker Change: After the Speaker's remarks, there will be a question and answer session.

Sarika Dhadwal: If you would like to ask a question during this time, simply press star, follow by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. I now like to turn the call over to Sarika Dhadwal, Senior Director of Investor Relations and ESG. You may begin.

Sarika Dhadwal: I now like to turn the call over to Sarika Dhadwal, Senior Director of Investor Relations and ESG. You may begin.

Sarika Dhadwal: Good morning. Thank you for joining Donaldson's fourth quarter and full-year fiscal 2024 earnings conference call. With me today are Todd Carpenter, Chairman, CEO and President, and Scott Robinson, Chief Financial Officer. This morning, Todd and Scott will provide a summary of our fourth quarter and full-year performance and details on our outlook for fiscal 2025. We will also provide an update on our fiscal 2026 financial targets. During today's call, we will discuss non-GAAP or adjusted results.

Sarika Dhadwal: Good morning. Thank you for joining Donaldson's fourth quarter and full year fiscal 2024 earnings conference call.

Speaker Change: With me today, our Todd Carpenter, Chairman, CEO and President in Scott Robinson, Chief Financial Officer. This morning, Tod and Scott will provide a summary of our fourth quarter and full-year performance and details on our outlook for fiscal 2025.

Speaker Change: We will also provide an update on our fiscal 2026 financial targets.

Speaker Change: During today's call, we will discuss non-gap or adjusted results.

Sarika Dhadwal: for fourth quarter and full-year fiscal 2024, non-GAAP results exclude pre-tax restructuring and other charges of 6.4 million related to footprint optimization and cost reduction initiative. This compares to 4.9 million and 21.8 million of charges in fourth quarter and full-year fiscal 2023 respectively, related to the organizational redesign as well as costs associated with exiting a lower margin customer program. A reconciliation of GAAP to non-GAAP metrics is provided within the schedules attached to this morning press release.

Speaker Change: For fourth quarter and full-year fiscal 2020-04, NAMDA results exclude pre-tax restructuring and other charges of 6.4 million related to footprint optimization and cost reduction initiatives.

Speaker Change: This compares to 4.9 million and 21.8 million of charges in fourth quarter and full-year fiscal 2023, respectively, related to the organizational redesign, as well as costs associated with exiting a lower margin customer program.

Speaker Change: A reconciliation of Gaptonon Gapmetrics is provided within the schedules attached to this morning's press release.

Sarika Dhadwal: 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 filing.

Speaker Change: Additionally, please keep in mind that any forward-looking statements may during this call are subject to risks and uncertainties which are described in our press release and SEC filing. With that, I'll now turn the call over to Tod Carpenter. Please go ahead. Thanks, Sarika. Good morning.

Sarika Dhadwal: With that, I'll now turn the call over to Tod Carpenter. Please go ahead. 

Tod E. Carpenter: Thanks Sarika. Good morning. Fiscal 2024 was another record year for Donaldson Company, record sales, record margins and record EPS. We surpassed $3.5 billion in sales, achieved operating margin of 15.4% and delivered adjusted EPS of $3.42, a 13% increase above prior year. Our cash conversion was over 97%, well above our historical average and we returned $286 million to our shareholders through dividends and share buybacks. Through mixed end market conditions, the Donaldson team furthered our mission of advancing filtration for a cleaner world through our investments and progress on our strategic initiatives, including our 2030 ESG admissions.

Tod Carpenter: Tiskell 2024 was another record year for balancing company, record sales, record margins, and record EPS.

Tod Carpenter: We surpassed $3.5 billion in sales, achieved operating margin of 15.4% and delivered a adjusted EPS of $3.42, a 13% increase above prior year.

Tod Carpenter: Our cast conversion was over 97% well above our historical average, and we return $286 million to our shareholders through dividends and share bybacks.

Donaldson: Through mixed and market conditions, the Donaldson team furthered our mission of advancing filtration for a cleaner world through our investments and progress on our strategic initiatives, including our 2030 ESG ambitions.

Tod Carpenter: I'll now discuss our fourth quarter results, which capped off a tremendous year for our company. Sales increased 6% over prior year, driven by higher volumes across all three operating segments. Operating margin improved 200 basis points over 2023 and EPS increased 21%. Each of our segments demonstrated sales growth and improved profitability. Here are some highlights. 

Donaldson: I'll now discuss our fourth quarter results which kept us a tremendous year for our company.

Donaldson: Sales increased 6% over prior year driven by higher volumes across all three operating segments.

Donaldson: Operating margin improved 200 basis points over 2023 and EPS increased 21%.

Donaldson: Each of our segments demonstrated sales growth and improved profitability.

Sarika Dhadwal: Good morning. Thank you for joining Donaldson's fourth quarter and full-year fiscal 2024 earnings conference call. With me today are Tod Carpenter, Chairman, CEO and President, and Scott Robinson, Chief Financial Officer. This morning, Todd and Scott will provide a summary of our fourth quarter and full-year performance and details on our outlook for fiscal 2025. We will also provide an update on our fiscal 2026 financial targets.

Tod Carpenter: In mobile solutions, volume was the primary driver of sales growth as a result of strength in our aftermarket business. Segment profitability continued to be robust as a result of mix, higher volumes, and pricing. In industrial solutions, aerospace and defense sales rose approximately 40% to a record level and drove industrial profit margin to an all time high. In life sciences, sales grew above 20% and profitability improved year over year.

Donaldson: Here are some highlights.

Donaldson: In mobile solutions, volume was the primary driver of sales growth as a result of strength in our aftermarket business.

Donaldson: Segment profitability continued to be robust as a result of mix, higher volumes and pricing.

Donaldson: In industrial solutions, aerospace and defense sales rose approximately 40% to a record level and drove industrial profit margin to an all-time high.

Sarika Dhadwal: During today's call, we will discuss non-GAAP or adjusted results for fourth quarter and full-year fiscal 2024, non-GAAP results exclude pre-tax restructuring and other charges of 6.4 million related to footprint optimization and cost reduction initiative. This compares to 4.9 million and 21.8 million of charges in fourth quarter and full-year fiscal 2023 respectively, related to the organizational redesign as well as costs associated with exiting a lower margin customer program. A reconciliation of GAAP to non-GAAP metrics is provided within the schedules attached to this morning press release.

Donaldson: In life sciences, sales grew above 20% and profitability improved year over year.

Tod Carpenter: Shortly after the end of the quarter, we completed the acquisition of a 49% stake in medical SVA, a leader in hollow fiber membrane technology and retained a call option to purchase the remaining 51% stake in the years to come. We are pleased with this investment and our joint development agreement as we work towards developing and commercializing hollow fiber modules for applications, including bio processing and food and beverage. Throughout the quarter, we maintained our focus on strong and consistent execution for our customers to our best in class operations teams and global footprint. With relatively stable supply chain conditions, we significantly improved on time delivery rates and our backlogs remain in great shape as we began fiscal 2025.

Charlie: Charlie after the end of the quarter, we completed the acquisition of a 49% stake in Metica SCA, a leader in Hallow-Fiverm membrane technology, and retain a call option to purchase the remaining 51% stake in the years to come.

Charlie: We are pleased with this investment and our joint development agreement as we work towards developing and commercializing hollow fiber modules for applications including vital processing and food in beverage.

Charlie: Throughout the quarter, we maintain our focus on strong and consistent execution for our customers who are best in class operations teams and global footprint.

Charlie: With relatively stable supply chain conditions, we significantly improve on time delivery rates and our backlogs remain in great shape as we begin fiscal 2025.

Tod Carpenter: We executed and also laid the groundwork for the future through R&D and capital expenditures. R&D investment increased approximately 16% over 2023 and included product development initiatives in our legacy and newly acquired businesses. Capital expenditures were primarily focused on increasing capacity and expanding new products and technology, including and our life sciences segment.

Charlie: We executed and also laid the groundwork for the future through R&D and Capital Expenditures.

Charlie: R&D investment increased approximately 16% over 2023 and included product development initiatives in our legacy and newly acquired businesses.

Charlie: Capital expenditures were primarily focused on increasing capacity and expanding new products and technology, including in our life sciences segment.

Tod Carpenter: Now some detail on fourth quarter sales. Total company sales were $935 million, up 6% year over year driven primarily by volume. Price contributed approximately 1%. In mobile solutions, total sales were $575 million, a 6% increase versus 2023. Aftermarket sales grew 13% to $453 million driven by solid growth in both the OE and independent channels. OE channels sales were up high teens versus prior year benefiting from a return to more normalized levels of demand following destocking in the prior year.

Charlie: Now some detail on fourth quarter sales.

Charlie: Total company sales were $935 million, up to 6% year over year, driven primarily by volume.

Speaker Change: Christ contributed approximately 1%.

Speaker Change: In mobile solutions, total sales were $575 million, a 6% increase versus 2023. After market sales, through 13% to $453 million, driven by solid growth in both the OE and independent channels.

Speaker Change: OE Channel sales were up high teams versus prior year, benefiting from a return to more normalized levels of demand following these stocking in the prior year.

Tod Carpenter: In the independent channel, sales increased high single digits as a result of improved product availability and market share gains. The strength and aftermarket was partially offset by continued declines in our first bit businesses. Off-road sales of $90 million decreased 13% as weak agriculture markets persisted in most regions. On-road sales declined 12% to $33 million due to lower equity production in China and the United States.

Speaker Change: In the independent channel, sales increased high single digits as a result of improved product availability and market share needs.

Speaker Change: The strength and aftermath it was partially offset by continued declines in our first fit businesses.

Speaker Change: Off-road sales of $90 million decrease, 13% as weak agriculture markets persisted in most regions.

Speaker Change: On-road sales decline 12% to 33 million dollars due to lower equilibrium production in China and the United States.

Tod Carpenter: I'll provide some additional color on our mobile business in China, where the macro environment remains difficult. Sales decreased 19% year over year driven by declines in our first fit businesses. While China now represents a low single digit portion of total segment sales, it remains a strategically important area for us over the long term. We are optimistic about our ability to gain share over time through programs already won and through our technology-led products as regulations become tighter and as Chinese manufacturers compete in Western markets.

Speaker Change: I'll provide some additional color on our mobile business in China, where the macro environment remains difficult.

Speaker Change: Sales decreased 19% year over year, driven by declines in our first fit businesses. While China now represents a low single-digit portion of total segment sales, it remains a strategically important area for us over the long term.

Speaker Change: We are optimistic about our ability to gain share over time through programs already one and through our technology led products as regulations become tighter and as Chinese manufacturers compete in Western markets.

Tod Carpenter: Now on the industrial solution segment. Industrial sales increased 4% to $288 million. Aerospace and defense sales rose 40% to $50 million, driven by robust commercial aerospace and road craft markets as well as ongoing demand in defense due to the modernization of equipment and the impact of global conflicts. Industrial filtration solutions or IFS sales declined 1.5% from weaker dust collection demand in Europe and powered generation project timing. In the life sciences segment, sales were $72 million, up 21% year over year largely as a result of disk drive sales, which continued to rebound from truck levels a year ago. Food and beverage sales also increased in the quarter.

Speaker Change: Now, on the end of the social solution segment.

Speaker Change: Industrial sales increased 4% to 288 million dollars.

Speaker Change: Aerospace and Defense sales rose 40% to $50 million, driven by robust commercial aerospace and road-of-craft markets, as well as ongoing demand in defense due to the modernization of equipment and the impact of global conflicts.

Speaker Change: Industrial filtration solutions or ISS sales declined 1.5% from weaker dust collection demand in Europe and power generation project timing.

Speaker Change: In the Life Sciences segment, sales were 72 million dollars of 21% near a year, largely as a result of disk drive sales, which continued to rebound from truck levels a year ago.

Speaker Change: Booty Babbers Settles, also increased in the quarter.

Tod Carpenter: Looking to fiscal 2025, Donaldson is poised for another record year, delivering value to our shareholders through record sales and record earnings. We are forecasting a sales increase between 2 and 6% driven by solid growth in all three segments, adjusted operating margin between 15.3%, and 15.9%, and adjusted earnings per share between $3.56 and $3.72.

Speaker Change: Looking to fiscal 2025, Donaldson is placed for another record year, delivering value to our shareholders through record sales and record earnings.

Speaker Change: We are forecasting a sales increase between two and six percent driven by solid growth in all three segments.

Speaker Change: adjusted operating margin between 15.3% and 15.9% and adjusted earnings per share between $3.56 and $3.72.

Tod Carpenter: Given fiscal 2024 results and our projections for fiscal 2025 and 2026, we are also taking the opportunity to update our fiscal 2026 financial targets previously laid out at our last investor day. First, on sales. We now expect consolidated sales to increase at a three-year CAGR between 3 and 7%, slightly below our previous 4 to 8% projection. Our updated view is driven by slower than expected sales ramp up in life sciences where biopharmaceutical markets have slowed. Our outlook for mobile and industrial solutions is unchanged.

Speaker Change: Given fiscal 2024 results and our projections for fiscal 2025 and 2026, we are also taking the opportunity to update our fiscal 2026 financial targets previously laid out at our last investor day.

Speaker Change: First, on sales. We now expect consolidated sales to increase at a three-year degree between three and seven percent, slightly below our previous four to eight percent projection.

Speaker Change: Our updated view is driven by a slower than expected sales ramp up in light sciences, where biopharmaceutical markets have slowed.

Speaker Change: Our outlook for mobile and industrial solutions is unchanged.

Tod Carpenter: With respect to consolidated operating margin, our fiscal 2026 target range is now 15.8% to 16.6%, slightly above our previous range of 15.6 to 16.4%, with mobile and industrial operating margins far exceeding our previous expectations and with the path to life sciences operating margin strength elongating. Our mobile and industrial businesses have benefited from sales mix, volume growth, pricing, and deflation of select input costs, and we expect current profitability levels to continue. With respect to life sciences, we now believe the ramp up in profitability will take longer than initially expected given macro pressures and constrained customer capital spending, particularly for early stage assets.

Speaker Change: With respect to consolidated operating margins, our fiscal 2026 target range is now.

Speaker Change: 15.8%

Speaker Change: to 16.6% slightly above.

Speaker Change: Our previous range of 15.6 to 16.4% with mobile and industrial operating margins, far exceeding our previous expectations and with the path to life sciences operating margins strength, elongating.

Speaker Change: Our mobile and industrial businesses have benefited from sales mix, volume growth, pricing, and deflation of select input costs. And we expect current profitability levels to continue.

Speaker Change: With respect to life sciences, we now believe the ramp up in profitability will take longer than initially expected given macro pressures and constrained customer capital spending, particularly for early stage assets.

Tod Carpenter: Our view of sales and profitability mix in the three-year projection period since Investor Day has somewhat changed. However, our ability to return value to our shareholders through higher levels of profitability on higher sales has not. We remain committed to and confident in our long-term strategy of utilizing our diversified technology-led portfolio of businesses to further penetrate existing markets and enter into new markets.

Speaker Change: Our view of sales and profitability mixed in the three year projection period since investor day has somewhat changed. However, our ability to return value to our shareholders through higher levels of profitability on higher sales has not.

Speaker Change: We remain committed to and confident in our long-term strategy of utilizing our diversified technology-length portfolio of businesses to further penetrate existing markets and enter into new markets.

Scott Robinson: Now I'll turn it over to Scott who will provide more details on the financials and our outlook. Scott? Thanks, Tod. Good morning, everyone. I would like to start by thanking our teams around the globe for their hard work. We had a terrific quarter, which concluded a terrific year. Our employees delivered for our customers and our shareholders, and I am proud of what we accomplished.

Speaker Change: Now I'll turn it over to Scott who will provide more details on the financials and our outlook.

Speaker Change: Scott. Thanks, Tod. Good morning, everyone. I'd like to start by thanking our teams around the globe for their hard work. We had a terrific quarter, which concluded a terrific year.

Scott: Our employees, to live for our customers and our shareholders, and I am proud of what we have accomplished.

Scott Robinson: Before I cover our outlook, I will provide details on fourth-quarter results. EPS grew 21% year over year to 94 cents on 6% sales growth. Operating profit increased 21% and operating margin was 16.3%, 200 basis points above 2023, driven by gross margin expansion and operating expense leverage. Gross margin of 36.2% increased 190 basis points above prior year from select input cost deflation and leverage on higher sales. Operating expenses as a percent of sales were 19.9% versus 20.0% a year ago from leverage on higher sales, partially offset by higher people related costs and acquisition related expenses.

Scott: Before I cover our outlook, I will provide details on fourth quarter results.

Scott: ETFs from 21% year over year to 94 cents on 6% sales growth.

Scott: Operating profit increased 21%.

Scott: and operating margin with 16.3% 200 basis points above 2023 driven by gross margin expansion and operating expense leverage.

Scott: Gross margin of 36.2% increased 190 basis points above prior year from select input cost deflation and leverage on higher sales.

Scott: Operated Expenses, as a percent of sales, or 19.9% versus 20.0% a year ago from leverage in higher sales, partially offset by how our people related costs and acquisition related expenses.

With respect to consolidated operating margin, our fiscal 2026 target range is now 15.8% to 16.6%, slightly above our previous range of 15.6 to 16.4%, with mobile and industrial operating margins far exceeding our previous expectations and with the path to life sciences operating margin strength elongating. Our mobile and industrial businesses have benefited from sales mix, volume growth, pricing, and deflation of select input costs, and we expect current profitability levels to continue.

Scott Robinson: Now I will discuss segment profitability. Mobile Solutions pre-tax profit margin was 18.3%, 210 basis points above prior year due to a favorable mix of strong aftermarket performance, volume growth, and pricing benefits. Improved manufacturing efficiency in our plants also contributed to strong performance. Industrial Solutions pre-tax profit margin was a record 20.1%, 90 basis points above a tough comparison 19.2% in the prior year period. The year-over-year improvement was driven by volume and pricing. Our margin performance in both mobile and industrial has been outstanding all year pushing Donaldson's blended margins to record levels. We look forward to continuing this robust performance in the years to come.

Speaker Change: Don't want to discuss segment property bills.

Speaker Change: Mova Solutions Pre-Tax Profit Margin's was 18.3%.

Speaker Change: 210 basis points above prior year, due to favorable next strong aftermarket performance, lawyened growth and pricing benefits.

Speaker Change: Improve Manufacturing and Fishing Sea and our plans also contributed to strong performance.

Speaker Change: Alas.

Speaker Change: Industrial Solutions Pretext Prof. Margin was a record, 20.1%, 90 basis points above a top comparison, 19.2% in the prior year period.

With respect to life sciences, we now believe the ramp up in profitability will take longer than initially expected given macro pressures and constrained customer capital spending, particularly for early stage assets.

Speaker Change: The year of the year improvement was driven by volume and crisis.

Speaker Change: Our margin performance in both mobile and industrial has been outstanding all year, pushing dialysis-blended margins to record levels.

Speaker Change: We look forward to continuing this robust performance in the years to come.

Scott Robinson: Our life science business generated a pre-tax loss of approximately 1%, including a headwind from acquisitions of 15 percentage points. This compares to a pre-tax loss of 12% in the prior year period. Leverage on higher sales from our legacy businesses drove the improvement. While profitability billion in segment has been negatively impacted by a slower acquisition-related sales round, combined with investments for growth, we are committed to and confident in the scaling of our acquisitions and to long-term, profitable growth in the segment.

Speaker Change: Our light science business generated a pre-tax loss of approximately 1% including an edland for macquisitions of 15% de points.

Speaker Change: This compares to a pretext loss of 12% in the prior year period.

Speaker Change: Leverage on higher sales from a legacy businesses, throw the improvement.

Speaker Change: While poverty building in segment has been negatively impacted by a smaller acquisition-related sales round, combined with investments for growth, we are committed to...

Now I'll turn it over to Scott who will provide more details on the financials and our outlook. Scott?

Speaker Change: and confident in the scaling of our acquisitions and to long-term breathable growth in their segments.

Scott J. Robinson: Thanks, Tod. Good morning, everyone. I would like to start by thanking our teams around the globe for their hard work. We had a terrific quarter, which concluded a terrific year. Our employees delivered for our customers and our shareholders, and I am proud of what we accomplished.

Scott Robinson: Turning to a few balance sheet and cashable savings highlights. Fourth quarter capital expenditures were approximately 19 million. Cash conversion in the quarter was 93% above historical averages and on par with prior year as our focus on working capital efficiency continues. In terms of wider capital employment, we returned approximately 82 million dollars to shareholders, inclusive of 32 million in the form of dividends and 49 million in share repurchases.

Speaker Change: Turning to a few balance sheets and cash will save them highlights.

Speaker Change: Fourth Quarter Capital of Sentences were approximately 19 million.

Speaker Change: Catched and rigging the quarter was 93% above historical averages, and on par with prior year as our focus on working capital efficiency continues.

Speaker Change: and Terrence of Otter Carpenter employment, in return to pressing the $82 million to share holders, including a 32 million of the form of dividends and 49 million in share reproductions.

Scott Robinson: Before turning to our fiscal 25 outlook, I will touch on a footprint and path optimization program we put in place this quarter, which resulted in pre-tax charges of 6.4 million or approximately 4 cents of EPS. One of Donaldson's core strengths and competitive advantages is our global footprint. With investments in every major region, we are able to support the production and distribution of our innovative and high growth products in region for region. As our business evolves, we continually strive to optimize our footprint and have identified certain projects resulting in improved efficiency.

Speaker Change: before turning to our fiscal 25th Outlook.

Speaker Change: I will touch on a footprint and cost optimization program. We put in place this corner which resulted in pre-tax charges of 6.4 million or approximately 4% of EPS.

Speaker Change: One of Dawson's core strengths and competitive advantages is our global footprint.

Speaker Change: With investments in every major region, we are able to support the production and distribution of our innovative and high-growth products in region for region.

Speaker Change: As our business evolves, we continually strive to optimize our footprint and have identified certain projects resulting in fluency efficiency.

Scott Robinson: Now our fiscal 25 outlook, first on sales. We forecast full year total sales increase between two and six percent. This includes a pricing benefit of approximately one percent and an immaterial impact from currency translation. For [inaudible] solutions, we are expecting an increase of between zero and four percent with growth in aftermarket and off-road more than offsetting on road declines. Aftermarket sales are projected increase low single digits after lapping solid results in the prior year as vehicle utilization rates remain high and as we continue to gain market share.

Speaker Change: Now our fiscal 25 outlook, first on sales.

Speaker Change: We've worked at full-year total sales increase between 2 and 6 percent.

Speaker Change: This includes a pretty better fit of approximately 1% and an immaterial impact from currency translation.

Speaker Change: Remorable solutions, we are expecting an increase in between zero and four percent with growth and half-so-market and off-road more than half-setting on-road declines.

Speaker Change: After market sales are projected to increase low single digits after laughing solid results in a prior year. As vehicle utilization rates remain high and as we continue to gain market share.

Scott Robinson: Off-road sales are forecast to increase low single digits for market share gains, partially offset by weaker demand from softer end market conditions, including in agriculture and construction. On road sales are expected to decrease low double digits as we exit certain non-strategic products and as global heavy duty truck production remains muted. Industrial solution sales are projected to grow between four and eight percent. IFS sales are expected to increase high single digits with strength across most businesses including dust selection, industrial hydraulics and industrial gas services.

Speaker Change: Offer of sales are forecasting three slow single digits for market share gains, partially asked by a week at a man from softer end market conditions, including in air culture and construction.

Speaker Change: On-road sales are expected to decrease low-double digits as the agents certain non-sortissive products, and as global heavy-duty track production remains muted.

Speaker Change: Industrial solution sales are projected to grow between 4 and 8 percent.

Speaker Change: IFS sales are expected to increase high-single digits with strains across most businesses, including dust collection, industrial hydraulics, and industrial gases.

Scott Robinson: Aerospace and defense sales are forecast to be flat year-over-year and high levels due to the lapping of an outstanding 2024 with the backdrop of supportive end market conditions. For life sciences, we expect an increase of low double digits driven by sales growth across all businesses. Our legacy businesses, including disk drive, food and beverage, and vehicle electrification, are all poised for strong performance, and we are pleased with the progress we have made on integrating our bioprocessing acquisitions.

Speaker Change: Aerospace and Defense Hills are forecast to be flat year over year, and hot at levels due to the lapping of an outstanding 2024 with the backdrop of supportive and market conditions.

Speaker Change: For light sciences, we expect an increase of low double digits driven by sales growth across all businesses.

Speaker Change: Our legacy businesses including disk strides, food and beverage, and vehicle electrification are all poised for strong performance, and we are pleased with the progress we have made on integrating our vital processing acquisitions.

Scott Robinson: As Tod mentioned, challenging market conditions and tightened customer capital spending have dampened our expectation for the segment in the near term. We expect profitability to be approximately break even for the full year. On a consolidated basis, we are forecasting adjusted operating margins between 15.3 and 15.9 driven by the same gross margin performance. At the midpoint, this represents an all-time record for the company, and it compares to an adjusted operating margin of 15.4% in 2024.

Speaker Change: As Todd mentioned, challenging market conditions and tightened customer capitals funding have dampened our expectations for the segment in the near term.

Todd: with respect for profitability to be approximately great even for the whole year.

Todd: Consolated basis, we are forecasting adjusted operating margins between 15.3 and 15.9% driven by the same gross margin requirements.

Speaker Change: At the midpoint, this represents all time record for the company and it's a very soon adjusted operating margin of 15.4% in 2024.

Scott Robinson: Our [inaudible] interest expense is approximately 21 million on par with the prior year. Other income, net, is forecast to be between 16 and 20 million, up from 13 million a year ago. Our tax rate is forecast between 23 and 25%, an increase from 22.7% in fiscal 2024 due to a reduction in discrete tax benefits. For adjusted EPS, we expect between $3.56 and $3.72, a 22 cents or 7% increase at the midpoint from adjusted EPS of $3.42 in the prior year. In total, in fiscal 2025, we are well poised to once again deliver higher levels of profitability on higher sales.

Speaker Change: are always for interest expense of approximately 21 million on power of the prior year. Other income net is forecast of the BB between 16 and 20 million up from 13 million a year ago.

Speaker Change: Our tax rate is forecast between 23% and 25% and the increase from 22.7% in fiscal 2024 due to a reduction in discrete tax benefits.

Speaker Change: For Adjusted EPS, we expect between $3.56 and $3.72, a 22 cent or 7% increase at the midpoint from adjusted EPS of $3.42 in the prior year.

Speaker Change: In total, in fiscal 2025, we are well-poised to once again deliver higher levels of profitability on higher sales.

Scott Robinson: Now on to our balance sheet and cash flow outlook. Cash conversion is anticipated to be in line with historical averages at 85 to 95%. Capital expenditures are projected between 85 million and 105 million, and will continue include growth investments, including capacity and new products and technologies. Our capital deployment strategy has not changed. Reinvestment back into Donaldson, organically or internationally, is our top priority. To that end, our R&D investments are forecast to continue to increase, and our M&A focus series remain life sciences and industrial services. We also intend to continue our long history of paying an increase in our dividend. Lastly, we plan to repurchase approximately 2 to 3% of shares outstanding.

Speaker Change: Now, once we're a balance sheet of cash, we'll all work.

Speaker Change: Caston Burrison is anticipated to be in line with historical averages at 85 to 95%.

Speaker Change: Capital Expeditioners are projected between 85 million and 105 million and will continue to include growth investments, including capacity and new products and technologies.

Speaker Change: Our cabin deployment strategy has not changed. We invest in back into Donaldson, organically, or internationally, are going to clearly, as our top priority.

Speaker Change: To that end, our R&D Investments, our forecast to continue to increase and our M&A focus service remain life sciences and industrial services.

Speaker Change: We also intend to continue our long history of pain and increase in our dividend. Lastly, we plant the repurchase project slate 2-3% of Sherry's onstanding.

Scott Robinson: Before turning the call back to Tod, I will provide some additional details on our updated fiscal 2026 financial targets. For mobile solutions, our sales outlook is unchanged. From a profitability standpoint, given our recent outperformance and expectations for continued strength, we are increasing our fiscal 2026 targeted operating margin range to between 18.1 and 18.9%, which at the midpoint is up 250 basis points from the initial range of 15.6 to 16.4%. In industrial solutions, our sales outlook is also unchanged.

Speaker Change: Before turning the call back to Scott, I will provide some additional details on our updated fiscal 2020-26 financial targets.

Speaker Change: For mobile solutions, our sales outlook is unchanged.

Scott: From a profitability standpoint, given our recent...

Scott: Hope performance and expectations for continued strengths, we are increasing our fiscal 2020-26 targeted operating margin range to between 18.1 and 18.9%.

Scott: which has a midpoint is a 250 basis point from the initial range of 15.6 to 16.4%.

Scott: and Industrial Solutions, our sales outlook is also unchanged.

Scott Robinson: However, given recent higher than expected profitability trends, and our forecast for continued leverage from higher sales, we have increased the operating margin range to between 17.8 and 18.6% which at the midpoint is over 100 basis points of improvement from 16.6 to 17.4% previously.

Scott: However, given recent higher than expected profitability trends

Scott: and our Forecast for continued leverage from higher sales. We have increased the operating margin range to between 17.8 and 18.6%.

Scott: which has a midpoint is over 100 basis points of improvement from 16.6 to 17.4 previously.

Scott Robinson: For life sciences, we are reducing our sales and margin expectations, given the aforementioned market dynamics. We now look for sales to increase at a 12 to 16% CAGR over the three year period versus 18 to 22% previously and forecast profitability between 5 and 11% below our previous range of 22.1 to 22.9%. Importantly, for the consolidated company, while we have lowered our total sales growth expectations to between 3 and 7% from 4 to 8% previously, we have improved our profitability outlook to between 15.8 and 16.6%, which at the midpoint is 20 basis points above our previous target.

Scott: For Life Sciences, we are reducing our sales and margin expectations, given the aforementioned market dynamics.

Scott: We now look for sales to increase at a 12 to 16% cager over the three-year period versus 18 to 22% previously.

Scott: and Forecast profitability between 5 and 11 percent below our previous range of 22.1 to 22.9 percent.

Scott: Importantly, for the consolidated company, while we have lower in our total sales growth expectations to be between 3 and 7% from 4 to 8% previously, we have in terms of our profitability outlook to between 15.8 and 16.6%.

Scott: which have a midpoint is 20 basis points of both our previous targets.

Tod Carpenter: I'll now turn the call back to Tod for some closing remarks. 

Speaker Change: I'm now turning the call back to the transition, close to your remarks.

Tod E. Carpenter: Thanks Scott. I'm excited by what lies ahead for Donaldson Company. Through our mission of advancing filtration for a cleaner world, the company has evolved driven by the strength of our team and our dedication to executing on our long term strategic initiatives. I am confident in our ability to deliver value to all of our stakeholders in the years to come. We're optimistic about the future in each of our segments. In mobile solutions, we remain the market leader with our technology led product portfolio.

Scott: Thanks, Scott.

Scott: I'm excited by what lies ahead for Donald's company through our mission of advancing filtration for a cleaner world that company has evolved driven by the strength of our team and our dedication to executing on our long-term strategic initiatives.

Speaker Change: I am confident in our ability to deliver values to all of our stakeholders and years to come. We are optimistic about the future in each of our segments.

Speaker Change: In mobile solutions, we remain the market leader with our technology lead product portfolio. Our proprietary razor to sell razor blade model has been paying dividends and we expect to continue to gain share.

Tod Carpenter: Our proprietary razor to sell razor blade model has been paying dividends and we expect to continue to gain share. In industrial solutions, we are excited about our connectivity strategy and the ongoing build out of our services capabilities. Our one stop shop approach is working. In life sciences, we are making progress in commercializing our bio processing business. We recently announced the expansion of our relationship through our universal technologies business with the gene therapy program at the University of Pennsylvania.

Speaker Change: In industrial solutions, we are excited about our connectivity strategy and the ongoing buildout of our services capabilities. Our one-stop shop approach is working.

Speaker Change: In light sciences, we are making progress in commercializing our vital processing business.

Speaker Change: We recently announced the expansion of our relationship through our universal technology's business with the Jean Therapy Program at the University of Pennsylvania.

Tod Carpenter: The gene therapy program or GTP is renowned for its pioneering work seeking to make gene therapies for rare diseases accessible worldwide. This expanded relationship is aimed at determining the scalability of product manufacturing using our bio reactors. Overall, the interest in our technologies is robust and our therapy pipeline is growing. While market conditions across our segments have and will continue to fluctuate, we are committed to investing for the future executing and remaining agile again, with the overarching mission of the company as our guiding principle.

Speaker Change: The Gene Therapy Program or GTP is renowned for its pioneering work, seeking to make Gene Therapy's for rare diseases accessible worldwide.

Speaker Change: This expanded relationship is aimed at determining the scalability of product manufacturing using our bioreactors.

Speaker Change: Overall, the interest in our technologies is robust and our therapy pipeline is growing.

Speaker Change: While market conditions across our segment have and will continue to fluctuate, we are committed to investing for the future, executing and remaining agile, again with the overarching mission of the company as our guiding principle.

Operator: In fiscal 2024, we made considerable progress on our 2030 ESG ambitions as well and we look forward to providing an update in the quarters to come and with our upcoming fiscal 2024 sustainability report. With that, I will now turn the call back to the operator to open the line for questions. 

Speaker Change: In fiscal 2024, we may consider a whole progress on our 2030 SGM missions as well, and we look forward to providing an update in the quarters to common, and with our upcoming fiscal 2024 sustainability report.

Speaker Change: With that, I will now turn the call back to the operator to open the line for questions.

Operator: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one in your telephone keypad to raise your hand and join the queue.

Speaker Change: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one in your telephone keypad to raise your hand and join the queue. Your first question comes from line of Brian Blair from Oppenheimer. Your lineman's open.

Bryan Blair: Your first question comes from line of Brian Blair from Oppenheimer. Your line is open. 

Brian Blair: Thank you. Morning, everyone. Morning Brian. I was hoping to level set a bit more on life sciences trends and outlook, at least with a growth trends outlook. I know that bioprocessing, you know, trailing revenue bases is quite limited to the numbers there and impacted by that, but you want to speak to fiscal '24 growth rates across food and bevs just drive vehicle expectation and bioprocessing and then what's contemplated in your fiscal 25 outlook for each.

Speaker Change: Thank you for joining everyone.

Brian Blair: Morning, Brian.

Brian Blair: I was hoping to level set up get more on life sciences trends and outlook, at least for the growth trends and outlook. And I know that bio processing, you know, trailing revenue bases is quite limited to the numbers here.

Tod E. Carpenter: Thanks Scott. I'm excited by what lies ahead for Donaldson Company. Through our mission of advancing filtration for a cleaner world, the company has evolved driven by the strength of our team and our dedication to executing on our long term strategic initiatives. I am confident in our ability to deliver value to all of our stakeholders in the years to come. We're optimistic about the future in each of our segments.

Speaker Change: are impacted by that, but you want to speak to Fiscal 24 group rates across Pudon Devs, Diss drive vehicle extrication and bioprocessing and then what's contemplated in your Fiscal 25 outwork for each.

Tod E. Carpenter: Brian, we haven't broken the model out externally to that level. We can tell you that we do expect low double digit growth though in food and beverage. Bioprocessing will certainly be a bit more muted and that's what we put within the model. That's really the longer term change, if you will, and then [inaudible] will continue to crawl forward from the bottoms we experienced here over the past year. That's just generally kind of how you would put the model together.

Speaker Change: We haven't broke the model out externally to that level, we can tell you that we do expect.

Speaker Change: and Logan Double did you grow so in food and beverage, while processing will certainly be a bit more muted, and that's what we put within the model, that's really the...

Tod E. Carpenter: In mobile solutions, we remain the market leader with our technology led product portfolio. Our proprietary razor to sell razor blade model has been paying dividends and we expect to continue to gain share. In industrial solutions, we are excited about our connectivity strategy and the ongoing build out of our services capabilities.

Our proprietary razor to sell razor blade model has been paying dividends and we expect to continue to gain share. In industrial solutions, we are excited about our connectivity strategy and the ongoing build out of our services capabilities.

Speaker Change: the longer-term change, if you will, and then describe will continue to crawl forward from the bottoms we experienced here over the past year.

Our one stop shop approach is working. In life sciences, we are making progress in commercializing our bio processing business. We recently announced the expansion of our relationship through our universal technologies business with the gene therapy program at the University of Pennsylvania.

Speaker Change: That's just generally kind of how you would put the model together.

Brian Blair: Okay, understood. And the step up in fiscal 26 mobile and industrial profit expectations is encouraging certainly supported by trends of your operations, maybe speak to what the key drivers have been for much stronger than an expected margin of expansion in the legacy segments, particularly in mobile. And then on the life sciences side, we know that the demand backdrop for biopharma is still muted. Is that the exclusive driver of the lowered growth and profit outlook, or they're also differences in the forward model in terms of investments required, cost structure etc.

Speaker Change: Okay, understood. The step up in fiscal 26th, mobile and industrial profit expectations is encouraging certainly supported by the trends of your operations.

Speaker Change: and maybe speak to what the key drivers have been for much stronger than an expected margin of stange in the legacy segments, particularly in mobile. And then on the lifeline to side we know that the demand back drop in microbiopharm is.

Speaker Change: is still muted, is that the exclusive driver of the lowered growth and profit outlook, or they're also...

Tod E. Carpenter: So let's take mobile first. Within mobile, what you have is really the power of the mix overall expanding the operating margin. Specifically, we have got clear share gain within our aftermarket organizations. We also have the benefit of a little bit of tailwind due to the OED stocking in the past. So given a sense of where we are, for example, on that mix.

Speaker Change: The difference is in the forward model in terms of investments required, cost, structure, et cetera.

Speaker Change: So let's take mobile first. In within mobile, what you have is really the power of the mix.

Speaker Change: Overall expanding the operating margin specifically we have got clear.

Speaker Change: ShareGain within our aftermarket organizations. We also have the benefit of a little bit of the tailwind due to the OED stocking in the past. So given a sense of where we are, for example, on that next.

Tod Carpenter: You will have seen on our OE channel within the aftermarket, which is about 40% of that business is up say high teens within the quarter. And then when you look at the independent channel, which is 60%, you'll have seen clear share gains and up high single digits. That really shows the power of the mix. You also have obvious headwinds within the OE sector of the first fit production within mobile solutions. And specifically what really showed up in this quarter, the new piece of data would be a little bit more headwind in mining, which we had not been experiencing in the past.

Speaker Change: You will have seen on our OE channel with an aftermarket, which is about 40% of that business is up.

Speaker Change: Say hi teens within the corner and then when you look at the independent channel, which is 60% you'll have seen clear share gains and up high single digits.

Speaker Change: That really shows the power of the mix. You also have obvious headwinds within the OE sector of the first fit production within mobile solutions and specifically what really showed up in this quarter, the new piece of data would be a little bit more headwind in mining, which we had not been experiencing in the past.

Brian Blair: Thank you. Morning, everyone. Morning Brian.

Brian Blair: Thank you. Morning, everyone.

Tod E. Carpenter: Morning Brian.

Brian Blair: I was hoping to level set a bit more on life sciences trends and outlook, at least with a growth trends outlook. I know that bioprocessing, you know, trailing revenue bases is quite limited to the numbers there and impacted by that, but you want to speak to fiscal '24 growth rates across food and bevs just drive vehicle expectation and bioprocessing and then what's contemplated in your fiscal 25 outlook for each.

Tod Carpenter: So net net, we've got a good strong mix opportunity. We're very optimistic about the future and being able to hold that operating margin specifically because of the share gains we have in the aftermarket. And we've been working really hard to get a fair relationship with our OE's and get the pricing opportunities appropriate there. Within the life sciences sector, yes, the bio processing upstream and downstream is really where we look to grow. That is clearly a more careful market at this point in time.

Speaker Change: So, you know, net net, we've got a good strong mix opportunity. We're very optimistic about the future and we've been able to hold that operating margins specifically because of the share gains we have in aftermarket. And we've been working really hard to get a fair relationship with our OEs and get the pricing opportunities appropriate there.

Speaker Change: Within the Life Sciences sector, yes, the bio-processing.

Speaker Change: Upstream and downstream is really where we look to grow. That is clearly...

Tod Carpenter: We also would point out that new cell and gene therapy development is also a place where we look to grow. What's interesting about when you combine those, we see less expansion by the biopharma within the bio processing equipment sector and so that has become more muted. As well as in the cell and gene therapy activities, we told you we had about 140 or so development programs within therapeutics. We're up in the quarter double digits.

Speaker Change: and a more careful market at this point in time. We also would point at that.

Speaker Change: New Cell and Gene Therapy Development is also a place where we look to grow. What's interesting about when you combine those, we see less expansion by the bio-farmouth within the bio-processing equipment sector, and so that has become more muted.

Speaker Change: as well as in the Selengeting Therapy Activities.

Speaker Change: We told you we had about 140 or so development programs within therapeutics.

Tod Carpenter: You can see the slowness happening for example with less programs going into phase one, phase two clinical trials. And so things are just evolving more slowly than we would have expected and it's just really the backdrop of the comprehensive sector if you will. Yeah, I understand. Appreciate the color. And one more quick one if I may. Perhaps offer a little more color around medic SVA and then you know fit in the portfolio and your continued build out of the bioprocessing puzzle that you've laid out.

Speaker Change: and we're up in the quarter double digits.

Speaker Change: You can see the slowness happening for, not with less programs going into phase one, phase two clinical trials.

Speaker Change: and so things are just evolving more slowly than we would have expected and it's just...

Speaker Change: really the backdrop of the comprehensive sector, if you will.

Speaker Change: Thank you. I appreciate the color. I'm not one more quick when I find being perhaps a little more cooler around Medicare SPA and fit in the portfolio and you're continuing to build out of the you know, bio-processing puzzle that you've been able to do.

Tod E. Carpenter: Yeah, you know, we're really optimistic about what we have within the bioprocessing activities. We look at the some of the parts and we're very positive. Clearly, the market is telling us it's going to take longer than we had originally hope. In our typical Donaldson other models, when programs slip, they'll slip a quarter or two quarters, but within bioprocessing, they seem to slip a year or two years. And so we just thought it was prudent within the longer term outlook to take that into account  and therefore the model has changed.

Speaker Change: Yeah, we're really optimistic about what we have within the child processing activities. We look at some of the parts and we're very positive. Clearly, the market is telling us it's going to take longer than we had originally hoped.

Speaker Change: You know, in our typical Dallas and other models, when programs slip, they'll slip a quarter or two quarters, but it would invite a processing they've seen slip a year or two years. And so that's really, we decided it was proven within the longer-term outlook to take that into account, and therefore the model change. But overall, when you saw it out, we're excited about what we have. The customers are telling us they're excited about the overall products that we're bringing to them. They are disrupted, they like the efficiency output that it brings to them. We just need to continue as a company to work our process to commercialize them and push them out. It's just going to take a little bit of a...

Tod Carpenter: and therefore the model has changed. But overall, when you sum it up we're excited about what we have, the customers are telling us they're excited about the overall products that we're bringing to them. They are disrupted. They like the efficiency output that it brings to them. We just need to continue as a company to work our process to commercialize them and push them out. It's just going to take a little bit more time than we had originally thought, but [inaudible]. Okay, understood. Thanks again.

Speaker Change: and more time than we had originally thought, but I'm a good trick.

Tim Syne: Your next question comes from a line of Tim Syne from Raymond James. Your line is open. Oh, good. Thank you. Good morning. The first question just on the industrial segment, I was hoping you could maybe give it a little bit more color specifically on IFS and you mentioned in the release some of the timing issues that may have impacted sales in the quarter, but you know that it's kind of a step up in growth projected here in 25.

Speaker Change: Good, thank you very much.

So net net, we've got a good strong mix opportunity. We're very optimistic about the future and being able to hold that operating margin specifically because of the share gains we have in the aftermarket. And we've been working really hard to get a fair relationship with our OE's and get the pricing opportunities appropriate there.

Speaker Change: Your next question comes from the line of Tim Thine from Raymond James, your line is open.

Speaker Change: Dade.

Tim Thine: Good, good morning. The first question was on the morning. Yeah, just on the industrial segment. I was hoping you could maybe give a little bit more color.

Anne: specifically Anne.

Tim Thine: on IFS and you mentioned in the release some of the timing issues that may have impacted fails in the quarter, but this kind of a step up in growth projected here in 25.

Within the life sciences sector, yes, the bio processing upstream and downstream is really where we look to grow. That is clearly a more careful market at this point in time. We also would point out that new cell and gene therapy development is also a place where we look to grow. What's interesting about when you combine those, we see less expansion by the biopharma within the bio processing equipment sector and so that has become more muted. As well as in the cell and gene therapy activities, we told you we had about 140 or so development programs within therapeutics. We're up in the quarter double digits. You can see the slowness happening for example with less programs going into phase one, phase two clinical trials. And so things are just evolving more slowly than we would have expected and it's just really the backdrop of the comprehensive sector if you will.

Tod Carpenter: And I guess it's a little hard to generalize for that segment just given the number of end markets, but one of the themes has kind of been around larger scale, CapEx, just a little slower to move forward and just maybe just some may lays around larger capital projects. And I know that's not a great generalization for what drives that segment, but maybe just give some color around the pieces within the portfolio that are giving you confidence in that high single digit growth projected in '25.

Speaker Change: I guess it's a little hard to generalize for that segment, just given a number of end markets, but one of the themes has kind of been around larger scale capex.

Speaker Change: Just a little slower to move forward and just maybe just some mail-as around larger capital projects. And I know that's not a great generalization for what drives that segment, but maybe just give some color around the pieces within the...

Speaker Change: The portfolio that are giving you confidence in that high single digit growth projected in 25.

Tod E. Carpenter: Yeah Tim, just generally as you as you described the macro of what we're experiencing, I think you're very spot on to the overall condition that we're experiencing. For example, IAF, so dust collection equipment in Europe certainly is muted. It's the biggest headwind that we have and it's specific to Europe. It's not other region based. And so that is the biggest headwind that we have. And then the other one is timing relative to power generation projects.

You can see the slowness happening for example with less programs going into phase one, phase two clinical trials. And so things are just evolving more slowly than we would have expected and it's just really the backdrop of the comprehensive sector if you will.

Speaker Change: Yeah, Tim, just generally as you describe the macro of what we're experiencing. I think you're very spot on to the overall condition that we're experiencing. For example, IAF, so dust collection, equipment in Europe certainly is muted, it's the biggest set wind that we have. And it's specific to Europe, it's not other region-based. And so that is the biggest trend we have. And then the other one is timing relative to power generation projects.

Brian Blair: Yeah, I understand. Appreciate the color. And one more quick one if I may. Perhaps offer a little more color around medic SVA and then you know fit in the portfolio and your continued build out of the bioprocessing puzzle that you've laid out.

Tod Carpenter: We still feel very good. It's a multi year positive trend within power generation, certainly going up, our backlogs are healthy. It's a very lumpy business that we've talked about many times before. It's just in a lumpy moment again. Therefore, it was down in the quarter. But as we look forward, we do not expect it to be down next year. We do expect it to be up year over year and we see that within our backlogs.

Speaker Change: We...

Speaker Change: Still feel very good at seeing it's a multi-year.

Speaker Change: Positive trends within Power Generation, certainly going up our backlog, their healthy. It's a very lumpy business that we talked about many times before. It's just in a lumpy moment again, therefore it was down in the quarter, but as we look forward, we do not expect it to be down next year. We do expect it to be up year over year and we see that within our backlogs.

Tod Carpenter: So we feel like that gives us confidence on the movement up. And then in dust collection IAF in Europe, it's pretty pretty tough there. We do expect conditions to repair slightly going forward. So the comp becomes a little bit easier to give us some tailwinds there. And then the third thing very importantly is our connected base products really are gaining momentum. We put up and set up about another 1,000 in the last fiscal year.

Speaker Change: So we feel like that gives this confidence on the movement up and then in Death's collection I have in Europe.

Speaker Change: You know, it's pretty tough there. We do expect conditions to repair slightly, going forward, so the cost becomes a little bit easier to give us some tailwinds there. And then the third thing very importantly, is our connected base products really are gaining momentum. We put up and stood up about another 1,000 in the last fiscal year. We do see they help us dry the aftermarket. And we are gaining share, really across the world, largely though, in the United States within our aftermarket execution.

and therefore the model has changed. But overall, when you sum it up we're excited about what we have, the customers are telling us they're excited about the overall products that we're bringing to them. They are disrupted. They like the efficiency output that it brings to them. We just need to continue as a company to work our process to commercialize them and push them out. It's just going to take a little bit more time than we had originally thought, but [inaudible].

and therefore the model has changed.

But overall, when you sum it up we're excited about what we have, the customers are telling us they're excited about the overall products that we're bringing to them. They are disrupted. They like the efficiency output that it brings to them. We just need to continue as a company to work our process to commercialize them and push them out. It's just going to take a little bit more time than we had originally thought, but [inaudible].

Tod Carpenter: We do see they help us drive after market and we are gaining share really across the world largely though in the United States within our after market execution. And so net net when you roll out together, that gives us the positive outlook for IFF within fiscal '25. 

Speaker Change: And so you know, that when you roll out as a gather, that gives us the power to develop for IFFs within physical 25.

Brian Blair: Okay, understood. Thanks again.

Operator: Your next question comes from the line of Tim Hynes from Raymond James. Your line is open.

Tim Hynes: Oh, good. Thank you. Good morning. The first question just on the industrial segment, I was hoping you could maybe give it a little bit more color specifically on IFS and you mentioned in the release some of the timing issues that may have impacted sales in the quarter, but you know that it's kind of a step up in growth projected here in 25.

Speaker Change: Very good. Thank you. And then I guess turning it to Capitol deployment.

Speaker Change: with a half a turn of net leverage, obviously, a really good position.

Tim Hynes: Very good. Thank you. And then, just I guess turning to capital deployment with I guess half a turn of net leverage, I've seen a really good position to be on the offensive. Maybe just with respect to the growth aspirations in life sciences in light of the tougher cyclical backdrop, does it change your motivation or just change your plan in terms of how much you want to invest in that area in light of a market that's maybe shaping up to be tougher than you thought?

Speaker Change: to be on the offensive. Maybe just, you know, with respect to the growth aspirations and life sciences in light of the...

Speaker Change: and a tougher cyclical backdrop.

Speaker Change: Is it change your motivation or just change your plan in terms of...

Speaker Change: How much you want to invest in that area in light of a market that's

Speaker Change: If he's shaping up to be tougher than he is far then.

Speaker Change: I guess maybe the correlator that would be there potentially must, maybe you're competing for less investment, just broadly speaking, or that just not the case.

Tod Carpenter: And I guess maybe the core learning that would be, is there potentially less, maybe you're competing for less investment, just broadly speaking or is that just not the case? So I don't know, it's an open ended question, but however you want to touch on that. Thank you. Yeah, let me try to unpack that. There's a lot there. So just generally at the company level relative to capital deployment, our priorities have not changed.

Speaker Change: So I'm the opening question, but however you want to touch on that, thank you.

Speaker Change: Yeah, let me try to unpack that. There's a lot there. So, just generally at the company level relative to capital deployment, our priorities have not changed. Let's get to that point. Without with inscript, we specifically will invest back in the company, organically and organically. We are targeted specifically at life sciences as well as service aspects and some pieces of the industrial. Primarily, life sciences, we like the play that we have within life sciences. Sure, it's a little bit elongated, but the longer term returns within that space still look very positive for us as we continue to enter it. As far as it is.

Tod E. Carpenter: Yeah Tim, just generally as you as you described the macro of what we're experiencing, I think you're very spot on to the overall condition that we're experiencing. For example, IAF, so dust collection equipment in Europe certainly is muted. It's the biggest headwind that we have and it's specific to Europe. It's not other region based. And so that is the biggest headwind that we have.

Tod Carpenter: As Scott pointed out within script, we specifically will invest back into the company organically and inorganically, we are targeted specifically at life sciences as well as service aspects and some pieces of the industrial primarily life sciences. We like the play that we have within life sciences. Sure, it's a little bit elongated, but the longer term returns within that space still look very positive for us as we continue to enter it. As far as opportunities for M&A within the space at this point in time, it has gone, let's say that's also perhaps a little bit more elongated than it has been in the past, but we saw very full pipeline, we're still developing good relationships, it's very strategic, very pleased, nothing changes at all relative to our strategy, and we sit in good shape.

Tod E. Carpenter: And then the other one is timing relative to power generation projects. We still feel very good. It's a multi year positive trend within power generation, certainly going up, our backlogs are healthy. It's a very lumpy business that we've talked about many times before. It's just in a lumpy moment again. Therefore, it was down in the quarter. But as we look forward, we do not expect it to be down next year. We do expect it to be up year over year and we see that within our backlogs.

Speaker Change: Opportunities for M&A within the space at this point in time. It has gone, let's say, that's also perhaps a little bit more elongated than it has been in the past, but we saw a very full pipeline in your so...

Tod Carpenter: it has gone, let's say that's also perhaps a little bit more elongated than it has been in the past, but we saw very full pipeline, we're still developing good relationships, it's very strategic, very pleased, nothing changes at all relative to our strategy, and we sit in good shape. I mean, [inaudible] out a bit to that. I mean, back to your comment about our half a turn debt level, I mean we generated cash conversion of 113% last year, 97% this year. We're forecasting in our guide 85 to 95,

Speaker Change: Development Good Relationships, it's very strategic, very pleased, nothing changes at all relative to our strategy and we sit in good shape.

So we feel like that gives us confidence on the movement up. And then in dust collection IAF in Europe, it's pretty pretty tough there. We do expect conditions to repair slightly going forward. So the comp becomes a little bit easier to give us some tailwinds there.

Speaker Change: And we make it that on a bit to that. I mean, if you back to your comment about our happened turn, that level I mean, we generated cash conversion of 113% last year, 97% this year.

And then the third thing very importantly is our connected base products really are gaining momentum. We put up and set up about another 1,000 in the last fiscal year. We do see they help us drive after market and we are gaining share really across the world largely though in the United States within our after market execution. And so net net when you roll out together, that gives us the positive outlook for IFF within fiscal '25. 

Speaker Change: We're forecasting, you know, in our guide 85 to 95. So very strong cash flows.

Speaker Change: Over the last few years, and another strong, you're projected. I mean, leave.

Speaker Change: We've stomach the acquisitions that we've completed.

Speaker Change: Bob 2% of our shares increase the dividend.

Tod Carpenter: so very strong cash flows over the last few years and another strong year projected. I mean, we've stomached the acquisitions that we've completed, bought 2% of our shares, increased the dividend and our debt slowly trickles down. So in the guide we also noted this year we're forecasting a share repurchase of 2 to 3% of our shares outstanding. If you look back the last several years, it's been spot on, 2% and so we've increased that a little bit in light of the very strong cash flows as the company has entered the last two years and again expected for next year.

Speaker Change: and our debt in a slowly trickles down.

Speaker Change: So, when the guide, we also know this year.

Speaker Change: We're forecasting the share-revergence of two to three for cents.

Speaker Change: of our shares outstanding. If you look back the last several years, it's been spot on 2%. And so we've increased that a little bit in light of the very strong cash flows at the company has entered the last two years and again, expected for next year. So we feel like we're in a really good shape.

Speaker Change: from a strategic capital deployment perspective, and that we're really being smart.

Speaker Change: with our allocating capital into this business.

Tod Carpenter: So we feel like we're in a really good shape from a strategic capital deployment perspective and that we're really being smart with our allocating capital into this business, which is, evidence by the debt slowly coming down. So we feel like we're in a pretty strong position. We do look to execute acquisitions and the timing of which is how it's something that's impossible to estimate. But we feel like we're in a very strong position and we did slightly tick up the share buyback guide for this year because of those strong cash flows. 

Speaker Change: which is evidence by the deck slowly coming down. So we feel like we're in a pretty strong position. We do look to execute acquisitions and those time in which.

Speaker Change: is I was something that's impossible to estimate, but we feel like we're in a very strong position and we did slightly tick up to share my back.

And I guess maybe the core learning that would be, is there potentially less, maybe you're competing for less investment, just broadly speaking or is that just not the case? So I don't know, it's an open ended question, but however you want to touch on that. Thank you.

Speaker Change: Guide for this year because of those strong cash flows.

Speaker Change: Okay, I'll squeeze one last one in. And the risk of cutting this or slicing this too finely, but I'll just ask them, with respect to the growth and aftermarket within the mobile business.

Tod E. Carpenter: Yeah, let me try to unpack that. There's a lot there. So just generally at the company level relative to capital deployment, our priorities have not changed.

Tim Hynes: Okay, I'll squeeze one last one in. There's the risk of cutting this or slicing this too finely, but I'll just ask, with respect to the growth in aftermarket within the mobile business, does the fact that you had the contract win in that share gain that you're experiencing in the independent channel, is that normalized? Is there a much of a mixed impact in 25 if you have, maybe the independent channel doesn't see the level of growth vis-a-vis the OE channel in 25?

Speaker Change: but does the fact that you had to contract Wayne in that share game that you experience in the independent channel?

Speaker Change: Is that normalizes? Is there a much of a mix impact in 25 if you have, maybe the independent channel doesn't see the level of...

Speaker Change: Growth Visa VDOE channel in 25, and others can be some different margin dynamics there, but just curious, if that's a meaningful factor in any way.

Tod E. Carpenter: I know there's some, can be some different margin dynamics there, but just curious if that's a meaningful factor in any way. I think the more meaningful factor to really take into account here is the OED stopping portion of the mix that you refer to because we do end up laughing when that began last fiscal year and we start to laugh that within this fiscal year into two. And so maybe that's something more important than what you're calling out rather to a particular large win on the independent channel. That's something to think about. And when you roll that within our overall growth rate, then expect it from that, maybe let's talk about it from that perspective.

Speaker Change: I think a more meaningful.

Speaker Change: A factor to really take into account here is the OED Stopping portion of.

it has gone, let's say that's also perhaps a little bit more elongated than it has been in the past, but we saw very full pipeline, we're still developing good relationships, it's very strategic, very pleased, nothing changes at all relative to our strategy, and we sit in good shape.

Speaker Change: The next that you refer to because we do end up laughing when that was.

Speaker Change: when that began last fiscal year and we start to laugh that within fiscal.

Speaker Change: within this fiscal year into two.

Tod Carpenter: And so maybe that's something more important than what you're calling out rather to a particular large win on the independent channel. That's something to think about. And when you roll that within our overall growth rate, then expect it from that, maybe let's talk about it from that perspective.

Speaker Change: and so maybe that's something more important than what you're calling out, Roller's rather to a particular large wind on the independent channel. That's something to think about. And you kind of when you roll that within our overall growth rate.

Scott J. Robinson: I mean, [inaudible] out a bit to that. I mean, back to your comment about our half a turn debt level, I mean we generated cash conversion of 113% last year, 97% this year. We're forecasting in our guide 85 to 95, so very strong cash flows over the last few years and another strong year projected. I mean, we've stomached the acquisitions that we've completed, bought 2% of our shares, increased the dividend and our debt slowly trickles down. So in the guide we also noted this year we're forecasting a share repurchase of 2 to 3% of our shares outstanding. If you look back the last several years, it's been spot on, 2% and so we've increased that a little bit in light of the very strong cash flows as the company has entered the last two years and again expected for next year.

Speaker Change: and then expected from that, maybe, maybe, the positive from that perspective.

Tim Hynes: Excellent. Thanks for all the time.

Scott Robinson: Thank you. Our next question comes from a line of Nathan Jones from Stifel. Your line is open. Good morning, this is Adam Carly on for Nathan. So growth margin improvement is very impressive. Besides price costs, what are the main buckets leading to better than expecting gross margins in the businesses? Any thoughts on expectations for gross margin going forward as the environment normalizes? Yeah, I mean, the company has obviously worked very hard on its gross margins over the last several years, getting back to the spikes of inflation that we saw.

Speaker Change: Excellent. Thanks for all the time.

Speaker Change: Your next question comes from the line of Nathan Jones from Steveville. Your line is open.

Speaker Change: Good morning, this is Adam Halley on Planeson.

Adam Halley: Adam, Adam.

Adam Halley: It's a gross margin for a bit of a very impressive, besides price costs, what are the main buckets we need to better than expect in gross margins and the business is? Any any thoughts on expectations for gross margin going forward as the environment normalizes?

Speaker Change: Yeah, I mean the company is obviously worked very hard on it.

Speaker Change: Gross Marges over the last several years, you know, getting back to the spikes of the inflation that we saw, and we just want to have reasonable commercial relationships with our customers. And so, you know, if the cost are going up, we've got to fast-pricet increases on.

Scott Robinson: And we just want to have reasonable commercial relationship with our customers. And so, if costs are going up, we got a past price increases on and they do the same to their customers. And certainly we think things are stabilizing now. We have some costs still going up, but some going down. So that's a good place to be. I think the world is hopefully normalizing. And we've worked hard on all aspects of gross margin. To get to a 36.2% gross margin for the fourth quarter and 35.6 for the year is where Donald should be right now.

Speaker Change: and they do the same to their customers and certainly we think things are stabilizing now, we have some cost.

Speaker Change: Snow going enough, but some going down so that's...

Speaker Change: That's a good place to be, I think, the world is hopefully normalizing.

Speaker Change: and you know, we've worked hard on all aspects of Rose margin.

Speaker Change: to get to a 36.2% gross margin.

Speaker Change: for the fourth quarter and 35.6 for the year is, as we're down should be right now, you know, we're expecting to maintain that well off-growth margin going forward, so we're not.

Speaker Change: for rejecting any massive increases, price, you know, for next year is forecast that there will only be 1% of revenues. So we're pretty pleased when I grow a smart and proponent of the class.

Scott Robinson: We're expecting to maintain that level of gross margin going forward. So we're not projecting any massive increases. Price for next year is forecast that there only be 1% of revenues. So we're pretty pleased with our gross margin performance of class and perform very well. And so hats off to their work to maintain cost and ensure we're executing as efficiently as possible. And then we always have to be able to continue to leverage what we're doing with higher levels of sales to generate higher levels of profitability.

Speaker Change: and performed very well, and so hats off to their work to maintain caution.

Speaker Change: In sure we're executing it as efficiently as possible, and then we always have to be able to continue to leverage.

Speaker Change: You know what we're doing with higher levels of sales?

Speaker Change: to generate higher levels of property, drop in a million, we are generating higher levels of sales. And, you know, as things have come now, now, you know, we really move back to our traditional roots of improving our posture.

Speaker Change: and we did announce a foreign corner program whereby we're looking at foot written and cops optimization programs and why that won't necessarily provide benefit.

Speaker Change: You know, immediately, longer term will be benefits from that. So, you know, we're going to keep working on that gross margin and we feel like we're definitely heading in the right direction with how things are performing and that's why we think we can maintain these current levels.

Scott Robinson: And we are generating higher levels of sales. And as things have calmed down now, we've really moved back to our traditional roots of improving our cost structure. And we did announce a fourth quarter program whereby we're looking at a footprint and cost optimization program. And while that won't necessarily provide benefits immediately, longer term there'll be benefits from that. So, we're going to keep working on our gross margin. We feel like we're definitely headed in the right direction with how things are performing. And that's why we think we can maintain these current levels.

Speaker Change: It's really helpful. And then just a quick follow-up. What is the honor of Tod Carpenter related to? And do you expect to do any more of the product line rationalization?

Speaker Change: Yeah, you know, if you remember while back we talked about the exit of some product lines

Thank you. Our next question comes from a line of Nathan Jones from Stifel. Your line is open. Good morning, this is Adam Carly on for Nathan. So growth margin improvement is very impressive. Besides price costs, what are the main buckets leading to better than expecting gross margins in the businesses? Any thoughts on expectations for gross margin going forward as the environment normalizes?

Operator: Thank you. Our next question comes from a line of Nathan Jones from Stifel. Your line is open.

Speaker Change: Across the company, and we have one particular product, it's a depth tank product, that's really not an art for, and we've been producing those for years and years and years.

Adam Michael Farley: Good morning, this is Adam Farley on for Nathan. So growth margin improvement is very impressive. Besides price costs, what are the main buckets leading to better than expecting gross margins in the businesses? Any thoughts on expectations for gross margin going forward as the environment normalizes?

Speaker Change: and because it's really not a technology-less alterations solution.

Speaker Change: We're getting a lot of that business and work for our customer transition elsewhere. And there's a revenue haircut from that, but...

Speaker Change: You know, thinking about the capital we employ, the investments for future, we decided that was a strategic to the company. So that's a, I had to win that we've accounted for in our guidance this year in terms of first fit sales. But I think it's the right decision for the company.

Adam Michael Farley: That's really helpful. And then just a quick follow up. What is the other product line related to and do you expect to do any more product line rationalization? Yeah, if you remember a while back, we talked about the exit of some product lines across the company. And we have one particular product. It's a depth tank product. That's really not in our core. And we've been producing those for years and years and years.

Scott J. Robinson: Yeah, I mean, the company has obviously worked very hard on its gross margins over the last several years, getting back to the spikes of inflation that we saw. And we just want to have reasonable commercial relationship with our customers. And so, if costs are going up, we got a past price increases on and they do the same to their customers. And certainly we think things are stabilizing now. We have some costs still going up, but some going down. So that's a good place to be. I think the world is hopefully normalizing. And we've worked hard on all aspects of gross margin. To get to a 36.2% gross margin for the fourth quarter and 35.6 for the year is where Donald should be right now. We're expecting to maintain that level of gross margin going forward. So we're not projecting any massive increases. Price for next year is forecast that there only be 1% of revenues.

Speaker Change: Okay, thank you for taking my questions.

Speaker Change: Your next question comes from line of Brian Drab from William Blair, your line is open

Brian Drab: Hi, good morning. Thanks for taking my questions.

Brian Drab: I just have a couple at the moment. Now, I was wondering if you could talk more specifically about the NAFTA partnership and what went into that wind.

Speaker Change: Specifically, I'm curious if you could talk about the NAFTA Gold product line. What end markets are you getting increased access to? And anything else that you can do is just to flush out that wind and add some detail to that.

Scott Robinson: And because it's really not a technology led filtration solution, we're going to move on from that business and work with our customer transition elsewhere. And there's a revenue haircut from that but thinking about the capital we employ, the investments for future, we decided that wasn't strategic to the company. So that's a headwind that we've accounted for in our guidance this year in terms of first fit sales, but I think it's the right decision for the company. Okay, thank you for taking my questions.

We're expecting to maintain that level of gross margin going forward. So we're not projecting any massive increases. Price for next year is forecast that there only be 1% of revenues.

Speaker Change: Yeah, sure. So, you know, just basically it really hits the strength of the company, that's the why we want. Right. So, one word we have the technologies necessary, that they cover across a full portfolio product, that covers all the medium-heavy, using diesel-engine opportunities across multiple and market segments.

So we're pretty pleased with our gross margin performance of class and perform very well. And so hats off to their work to maintain cost and ensure we're executing as efficiently as possible. And then we always have to be able to continue to leverage what we're doing with higher levels of sales to generate higher levels of profitability. And we are generating higher levels of sales. And as things have calmed down now, we've really moved back to our traditional roots of improving our cost structure. And we did announce a fourth quarter program whereby we're looking at a footprint and cost optimization program. And while that won't necessarily provide benefits immediately, longer term there'll be benefits from that. So, we're going to keep working on our gross margin. We feel like we're definitely headed in the right direction with how things are performing. And that's why we think we can maintain these current levels.

Speaker Change: Light Construction Act, Mining, etc., and that really targeted because of our catalog. Second is because of, we really take great pride in customer service and customer relationships, and we have taken time to,

Operator: Your next question comes from line of Brian Drab from William Blair. Your line is open. Hi, good morning. Thanks for taking my questions. I just have a couple at the moment.

Speaker Change: Really get a strong relationship and good information shared between two companies.

Tod Carpenter: I was wondering if you could talk more specifically about the NAPA partnership and what went into that wind. Specifically I'm curious if you could talk about the NAPA gold product line, what end markets are you getting increased access to and anything else that you can do just to flush out that wind and add some detail to that.

Speaker Change: and such that our service levels to them are really quite good. And so, you know, you roll those things together and it allowed us to win this thing over time, and we believe it'll allow us to have a strong relationship with them as well.

Speaker Change: really played in that direction.

Speaker Change: Yeah, great, thank you. And then just to be clear, you know, I see a press release from August, but this is a partnership or even a step up your business with them prior to August, right? And this has been, um...

Tod E. Carpenter: Yeah, sure. So, you know, just basically it's really hits to the strength of the company is as to why we want, right? So one is we have the technologies necessary that they covet across a whole portfolio product that covers all the media heavy duty diesel engine opportunities across multiple end market segments like construction, mining, et cetera and that really targeted because of our catalog. Second is because we really take great pride in customer service and customer relationships and we have taken time to really give a strong relationship and good information share between two companies, such that our service levels to them are really quite good. And so you roll those things together and it allow us to win this thing over time and we believe it allows us to have a strong relationship with them as well. So really [inaudible].

Adam Michael Farley: That's really helpful. And then just a quick follow up. What is the other product line related to and do you expect to do any more product line rationalization?

Speaker Change: Contributing to the growth and the independent channel.

Scott J. Robinson: Yeah, if you remember a while back, we talked about the exit of some product lines across the company. And we have one particular product. It's a depth tank product. That's really not in our core. And we've been producing those for years and years and years. And because it's really not a technology led filtration solution, we're going to move on from that business and work with our customer transition elsewhere. And there's a revenue haircut from that but thinking about the capital we employ, the investments for future, we decided that wasn't strategic to the company. So that's a headwind that we've accounted for in our guidance this year in terms of first fit sales, but I think it's the right decision for the company.

Speaker Change: It has been, we felt as though we should put that press release out because it is material. And we wanted to signal everybody to say, hey, we do have this program when, and now it is clearly continuing to add to the growth on the independent channel, yes.

And because it's really not a technology led filtration solution, we're going to move on from that business and work with our customer transition elsewhere. And there's a revenue haircut from that but thinking about the capital we employ, the investments for future, we decided that wasn't strategic to the company. So that's a headwind that we've accounted for in our guidance this year in terms of first fit sales, but I think it's the right decision for the company.

Speaker Change: Yeah, okay, got it, thank you. And then we talked a lot about margin, but I just want to ask you one more there, I'm not sure that.

Speaker Change: This was discussed in great detail, but I'm just thinking that one of the things that I believe has been helping margins lately has been the mix, right?

Tod Carpenter: And so you roll those things together and it allow us to win this thing over time and we believe it allows us to have a strong relationship with them as well. So really [inaudible].

Speaker Change: after market and first fit, first fit, it's been a little bit soft and can you just comment specifically on whether there could be a headwind from the first fit business eventually recovering and the proportion of sales from first fit increasing.

Adam Michael Farley: Okay, thank you for taking my questions.

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

Brian P. Drab: Hi, good morning. Thanks for taking my questions. I just have a couple at the moment. I was wondering if you could talk more specifically about the NAPA partnership and what went into that wind. Specifically I'm curious if you could talk about the NAPA gold product line, what end markets are you getting increased access to and anything else that you can do just to flush out that wind and add some detail to that.

Speaker Change: Thanks. Yeah, Brian, I think you have it, right?

Brian P. Drab: Yeah, great. Thank you. And then just to be clear, I see a press release from August, but this is a partnership or hearing stepped up your business with them prior to August, right? And this has been contributing to the growth in the independent channel. We felt as though we should put that press release out because it is material and we wanted to signal to everybody that, hey, we do have this program win and now it is clearly continuing to add to the growth on the independent channel, yes. Yeah, okay, got it. Thank you.

Speaker Change: You know, certainly our aftermarket.

Speaker Change: Sales, which is, you know, one of the critical strengths of the company to have two thirds of your business being replaced in parts, is really what drives the company. And we want to continue to self-apricize every first phase of solutions, because every time we do that, you know, we secure aftermarket business for many, many years to come.

Speaker Change: So as things cycle up and down and off road and on road and first fifth stale, you know obviously tend to cycle there is a mix impact of that and if you're if your aftermarket business is going on a raid much faster then your first fifth businesses you're going to have margin accretion

Scott Robinson: And then we talked a lot about margins, but I just want to ask one more there. I'm not sure that this was discussed in great detail. But I'm just thinking that one of the things that I believe has been helping margins lately has been the mix between aftermarket and first fit, it's been a little bit soft. Can you comment specifically on whether there could be a headwind from the first business eventually recovering and the proportion of sales from first fit increasing? Thanks.

Speaker Change: and if it switches the other way around, you're going to have some pollution. You know, we think we can continue to weather those storms and we've really factored that in.

Speaker Change: to our guide in going forward. So we do expect laundry term that certainly the first fit businesses are not going to be in the climb and certainly there's some well-publicized short term.

Speaker Change: You know, issues in the first fit business where you see some of our big customers.

Speaker Change: Get a retraction just a bit and we expect that to happen for a while and then ultimately return to growth.

Speaker Change: And so I think you have it right. We factored those concepts into our guide for next year as well as our revised, you know, and Vestry Targaryen forward to taking global solutions and industrial solutions.

Tod E. Carpenter: Yeah, Brian, I think you have it right. Certainly our aftermarket sales, which is one of the critical strengths of the company to have two-thirds of your business being replacement parts is really what drives the company and we want to continue to sell proprietary first fit solutions because every time we do that, we secure aftermarket business for many, many years to come. So as things cycle up and down in off road and on road and first fit sales, you know, obviously tend to cycle, there is a mix impact of that. And if your aftermarket business is growing at a rate much faster than your first fit businesses, you're going to have margin accretion. And if it switches the other way around, you're going to have some pollution.

Speaker Change: You know, off quite a bit, so we feel pretty good about the operating margin. Even at a light of the fact that at some point, the person will come back.

Speaker Change: All right, okay, thank you very much.

Brian P. Drab: Yeah, great. Thank you. And then just to be clear, I see a press release from August, but this is a partnership or hearing stepped up your business with them prior to August, right? And this has been contributing to the growth in the independent channel. We felt as though we should put that press release out because it is material and we wanted to signal to everybody that, hey, we do have this program win and now it is clearly continuing to add to the growth on the independent channel, yes.

Brian P. Drab: Yeah, great. Thank you. And then just to be clear, I see a press release from August, but this is a partnership or hearing stepped up your business with them prior to August, right? And this has been contributing to the growth in the independent channel.

Speaker Change: Your next question comes from line of Rob Mason from Bared. Your line is open.

Rob Mason: Hi, good morning. Just real quick, quickly I had a question on the fiscal 25 outlook. How are you thinking about the sales cadence?

Speaker Change: If you just want to break it down between first half, second half.

Tod E. Carpenter: We felt as though we should put that press release out because it is material and we wanted to signal to everybody that, hey, we do have this program win and now it is clearly continuing to add to the growth on the independent channel, yes.

Speaker Change: Yeah, if you could just comment on that.

Speaker Change: Chair, we're closer to a 49-51 than we are a 48-per-traditional 48-52.

Speaker Change #100: I see.

Scott Robinson: And if your aftermarket business is growing at a rate much faster than your first fit businesses, you're going to have margin accretion. And if it switches the other way around, you're going to have some pollution. We think we can continue to weather those storms. And we've really factored that in to our guidance going forward. So we do expect longer term that certainly the first fit businesses are not going to be in decline and certainly there's some well published by short term issues in the first fit business where you see some of our big customers retrenching just a bit

Speaker Change #101: Well, that kind of bleafed into my second question, just around the mobile solutions outlook, you know, the sharegains have been notable here. I think you outlined or detailed some, what seem like maybe incremental sharegains in the off-road business that support the outlook there just, that.

Brian P. Drab: Yeah, okay, got it. Thank you. And then we talked a lot about margins, but I just want to ask one more there. I'm not sure that this was discussed in great detail. But I'm just thinking that one of the things that I believe has been helping margins lately has been the mix between aftermarket and first fit, it's been a little bit soft. Can you comment specifically on whether there could be a headwind from the first business eventually recovering and the proportion of sales from first fit increasing? Thanks.

Speaker Change #102: My read is those are somewhat meaningful, just your customer base is talking about them.

Speaker Change #103: You know, more pressure there, certainly through the back half of the calendar year just if you could comment on, you know, your thoughts around how you may be performing their versus market volumes within your album.

Speaker Change #104: Yeah, we definitely have some share game there, no question about it and we did base that within the guide.

Scott Robinson: and we expect that to happen for a while and then ultimately return to growth. And so I think you have it right. We factored those concepts into our guide for next year, as well as our revised [inaudible] where we're taking in global solutions and industrial solutions quite a bit. So we feel pretty good about the operating margin, even in light of the fact that at some point first fit will come back. Okay, thank you very much.

Speaker Change #104: i

Speaker Change #104: Um...

Speaker Change #105: Any particular region that this bias to?

Speaker Change #106: Well, they're global base customers, so when we win, we really win by platform, and so it's top to specifically on this particular win, say, hey, this is a reading because it'll be more broad-base.

And if your aftermarket business is growing at a rate much faster than your first fit businesses, you're going to have margin accretion. And if it switches the other way around, you're going to have some pollution.

Speaker Change #107: Sure, sure. Okay. And then just last question, stepping back to the 2026 target revisions. Scott, I think in your commentary you talked about R&D would continue to increase, which is something we would expect. But did you put a little more context around how you think?

Rob Mason: Your next question comes from the line of Rob Mason from Baird. Your line is open. Hi, good morning. Just real quickly, I had a question on the fiscal 25 outlook. How are you thinking about the sales cadence if you just want to break it down between first half, second half. Yeah, if you could just comment on that. Sure. We're closer to a 49-51, than we are our traditional 48-52.

We think we can continue to weather those storms. And we've really factored that in to our guidance going forward. So we do expect longer term that certainly the first fit businesses are not going to be in decline and certainly there's some well published by short term issues in the first fit business where you see some of our big customers retrenching just a bit and we expect that to happen for a while and then ultimately return to growth. And so I think you have it right. We factored those concepts into our guide for next year, as well as our revised [inaudible] where we're taking in global solutions and industrial solutions quite a bit. So we feel pretty good about the operating margin, even in light of the fact that at some point first fit will come back.

Speaker Change #108: R&D, trends over the next couple of years relative to your upwardly revised op margin guidance, and really more specifically. How should we think about that as a percent of sales? Does it go up as a percent of sales? Does a state where it is?

and we expect that to happen for a while and then ultimately return to growth. And so I think you have it right. We factored those concepts into our guide for next year, as well as our revised [inaudible] where we're taking in global solutions and industrial solutions quite a bit. So we feel pretty good about the operating margin, even in light of the fact that at some point first fit will come back.

Speaker Change #109: Now, we, you know, I'm not going to have been pretty consistent over the years.

Robert W. Mason: I see. Well, that kind of bleeds into my second question just around the mobile solutions outlook. The share gains have been notable here. I think you outlined or detailed what seemed like maybe incremental share gains in the off road business that support the outlook there. My read is those are somewhat meaningful, just your customer base is talking about more pressure there. Certainly through the back half of the calendar year, just if you could comment on your thoughts around how you may be performing there versus market volumes within your album.

Speaker Change #110: You know, R&D is a critical importance to Donaldson, we are a technology lead filtration company and when we start thinking about our budget for the next year, you know, we really think hard about what?

Speaker Change #110: Motties, we want to allocate to R&D, and we expect to continue to increase.

Brian P. Drab: Okay, thank you very much.

Your next question comes from the line of Rob Mason from Baird. Your line is open. Hi, good morning. Just real quickly, I had a question on the fiscal 25 outlook. How are you thinking about the sales cadence if you just want to break it down between first half, second half. Yeah, if you could just comment on that.

Operator: Your next question comes from the line of Rob Mason from Baird. Your line is open.

Speaker Change #110: Our R.R.D. Spend.

Speaker Change #110: Both in terms of dollars and in terms of rate of sales.

Speaker Change #110: If you look at the, you know, it does go up and down, but the longer trend is free, significant increase over the last few years. And we want to continue that. We want to continue to invest in new technologies. You know, we have some great opportunities and life sciences to invest.

Robert W. Mason: Hi, good morning. Just real quickly, I had a question on the fiscal 25 outlook. How are you thinking about the sales cadence if you just want to break it down between first half, second half. Yeah, if you could just comment on that.

Tod E. Carpenter: Yeah, we definitely have some sugar in there. No question about it. And we did bake that within the guide. Any particular region that this bias to? Well, they're global based customers, so when we win it, we really win by platform and so it's tough to specifically on this particular win say hey, this is the region because it'll be more broad based. 

Speaker Change #110: You know, we're nearing 3% of sales.

Speaker Change #110: and we've been under that and we're going to continue to allocate both capital and expensive dollars into R&D because that's really our best opportunity.

Tod E. Carpenter: Sure. We're closer to a 49-51, than we are our traditional 48-52.

Speaker Change #110: for Returns on Invested Capital is to do it.

Speaker Change #110: in-house with our spectacular R&D team that we have. Yeah, and the way we talk it through out the company is, we're a technology lead company. We want to continue to embed cool things pretty straightforward.

Robert W. Mason: Okay, sure. And then just last question, you're stepping back to the 2026 target revisions, Scott, I think in your commentary, you talked about R&D would continue to increase, which is something we would expect, but could you put a little more context around how you think R&D trends over the next couple of years relative to your upwardly revised op margin guidance and really more specifically, how should we think about that as a percent of sales? Does it go up as a percent of sales? Does it stay where it is?

Speaker Change #111: No, understood. And just one last quick one, just related to the restructuring that you outlined. Scott, you'd mention that those benefits would play out over time. Is there something included in the 25 outlook related to the benefits from those that extend beyond 25?

Scott: Now, there would be much impact in 25, you know, we're going to continue to focus, focus on footprint and cost optimization, and there will be some more actions that I'm sure we can identify this year, but they take a while to, you know, run through and start to show up.

Scott: But we're just trying to make the company consistent with our historical approach of things, you know, more efficient every year and that takes some investments, but the returns on those investments, while not a one year payback, usually shows up in here two or here three for sure.

Scott J. Robinson: Now, Todd and I have been pretty consistent over the years. R&D is of critical importance to Donaldson. We are a technology led filtration company. And when we start thinking about our budget for the next year, we really think hard about what monies we want to allocate to R&D and we expect to continue to increase our R&D spend both in terms of dollars and in terms of rate of sales.

Speaker Change #112: Very good. Appreciate the update. Thank you.

Speaker Change #112: That concludes our question and answer session. I will now turn the call back over to Tod Carpenter for some final closing remarks.

Tod Carpenter: That concludes the call today. Thanks to everyone who participated and we look forward to reporting our first quarter fiscal 20, 25 results in November. Goodbye.

Speaker Change #113: This concludes today's conference call. Thank you for your participation. You may now disconnect.

Scott Robinson: If you look at the--it does go up and down, but the longer trend is, pretty significant increase over the last few years and we want to continue that. We want to continue to invest in new technologies. We have some great opportunities in life sciences to invest. We're nearing 3% of sales and we've been under that and we're going to continue to allocate both capital and expense dollars into R&D because that's really our best opportunity for returns on invested capital is to do it in house with our spectacular R&D team that we have.

Scott Robinson: because that's really our best opportunity for returns on invested capital is to do it in house with our spectacular R&D team that we have. Yeah. And the way we talk through out the company is we're a technology led company. We want to continue to invent cool things. Pretty straightforward. 

because that's really our best opportunity for returns on invested capital is to do it in house with our spectacular R&D team that we have.

Tod E. Carpenter: Yeah. And the way we talk through out the company is we're a technology led company. We want to continue to invent cool things. Pretty straightforward.

Scott Robinson: No, understood. And just like one last quick one just related to the restructuring that you outlined, Scott, you mentioned that those benefits would play out over time, is there something included in the 25 outlook related to the benefits from those or do they extend beyond 25? Now there would be much impact in 25. We're going to continue to focus on footprint and cost optimization and there'll be some more actions that I'm sure we can identify this year.

Robert W. Mason: No, understood. And just like one last quick one just related to the restructuring that you outlined, Scott, you mentioned that those benefits would play out over time, is there something included in the 25 outlook related to the benefits from those or do they extend beyond 25?

Scott J. Robinson: Now there would be much impact in 25. We're going to continue to focus on footprint and cost optimization and there'll be some more actions that I'm sure we can identify this year. But they, they take a while to, you know, run through and start to show up. But we're just trying to make the company, you know, consistent with our historical approach of things, you know, more efficient every year. And that takes some investment, but the returns on those investment while not a one year payback usually shows up in year two or year three for sure.

Scott Robinson: But they, they take a while to, you know, run through and start to show up. But we're just trying to make the company, you know, consistent with our historical approach of things, you know, more efficient every year. And that takes some investment, but the returns on those investment while not a one year payback usually shows up in year two or year three for sure. Very good. Appreciate the update. Thank you.

But they, they take a while to, you know, run through and start to show up. But we're just trying to make the company, you know, consistent with our historical approach of things, you know, more efficient every year. And that takes some investment, but the returns on those investment while not a one year payback usually shows up in year two or year three for sure.

Robert W. Mason: Very good. Appreciate the update. Thank you.

Operator: That concludes our question and answer session. I will now turn the call back over to Tod Carpenter for some final closing remarks.

Tod Carpenter: I will now turn the call back over to Todd Carpenter for some final closing remarks.

Tod E. Carpenter: That concludes the call today. Thanks to everyone who participated and we look forward to reporting our first quarter fiscal 2025 results in November. Goodbye.

Operator: Goodbye.

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

Operator: You may now disconnect. Connect. Thank you.

Thank you.