Q2 2025 Donaldson Co Inc Earnings Call
We're trying to make a comeback here.
Krista: Ladies and gentlemen, thank you for standing by. My name is Krista and I will be your conference operator today. At this time I would like to welcome everyone to the Donaldson second quarter fiscal year 25 earnings conference call and webcast.
Krista: All lines have been placed on mute to prevent any background noise.
Krista: After the speaker's remarks, there will be a question and answer session.
Krista: If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad.
Krista: And if you would like to withdraw that question, again, press star 1. Thank you. I would now like to turn the conference over to Sarika Dhadwal, Senior Director, Investor Relations and ESG. You may begin.
Sarika Dhadwal: Good morning. Thank you for joining Donaldson's second quarter fiscal 2025 earnings conference call. With me today are Tod Carpenter, Chairman, President and CEO, and Brad Pogalz, Chief Financial Officer.
Speaker Change: This morning, Todd and Brad will provide a summary of our second quarter performance and our updated outlook for fiscal 2025.
During today's call, we will discuss non-GAAP or adjusted results.
Speaker Change: For second quarter 2025, non-GAAP results exclude pre-tax restructuring charges of $2.2 million related to footprint optimization and cost reduction initiatives, as well as $4.4 million of business development charges.
Speaker Change: A reconciliation of gap-to-non-gap metrics is provided within the schedules attached to this morning's press release.
Speaker Change: 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 FEC filing. With that, I will now turn the call over to Todd.
Todd: Thanks, Sarika. Good morning, everyone. I am proud of what the Dawson team accomplished this quarter through resilience and dedication.
We delivered for our stakeholders.
Todd: Total sales increased in constant currency and earnings rose at a faster pace, reflecting overall margin improvement.
Todd: We executed on what was in our control in light of macro headwinds.
Todd: Our team navigated a choppy operating environment, and with the benefits of our diversified portfolio of businesses, delivered higher sales in key, higher margin businesses.
Todd: We diligently managed costs and pricing and exercised strong expense discipline while still investing for the future.
Now, some highlights from each of our segments.
Todd: In all three segments, sales were impacted by weak end-market conditions, including in agriculture, transportation, industrial gases, dust collection, and bioprocessing.
Todd: In spite of that backdrop, in mobile solutions, sales grew in constant currency, driven by solid aftermarket performance, where we continue to gain share.
Todd: Our recently opened distribution center in Olive Branch, Mississippi is allowing us to deliver products with speed and reliability, and our fill rates remain at almost 100%.
Todd: We are also planning ahead and ensuring we are well-positioned to address all future engine adoption scenarios with our alternative power solution.
Todd: In January, we announced a partnership with Daimler Truck North America on their hydrogen fuel cell project.
Todd: Donaldson's advanced air filter technology will be featured in the next generation Freightliner Super Truck 2, solidifying our position at the forefront of hydrogen fuel cell innovation.
Todd: In Industrial Solutions, our aerospace and defense business is outperforming our expectations.
Todd: Demand for new equipment in commercial aerospace has been at record levels and defense orders and quoting activity are very strong.
Todd: Overall, we continue to build our industrial business through our Create, Connect, Replace Service business model. The number of connected machines and customer facilities is growing, and both metrics were up double digits in the quarter.
Todd: Our services businesses are performing well, and our most recent acquisition, EasyFlow, which expanded our capabilities and presence in the Southeast United States, is outpacing our sales expectations.
In life sciences, pre-tax profit margin improved sequentially and year-over-year.
Todd: The cost reduction actions we implemented last quarter are taking hold, and we are now leveraging, with higher sales, a more focused cost structure.
Todd: We are working to grow our high-margin legacy businesses, such as Disc Drive and Food & Beverage, and scale our acquired businesses.
Todd: In bioprocessing, early stage capital spending is still constrained, however, our therapy pipeline remains solid, and we look forward to continuing to expand our presence.
Now I'll cover some consolidated company highlights.
Todd: Sales of $870 million decreased 1% year-over-year driven by a 170 basis point negative impact from currency translation.
Todd: Excluding currency, sales increased 1% with a pricing benefit of approximately 1%.
Todd: Adjusted EPS in the quarter was 83 cents, up roughly 3% versus prior year.
Todd: Margins remain strong including operating margin which expanded year-over-year as a result of expense discipline.
Todd: Our global operations teams, in several cases working through supply chain challenges, delivered on our backlogs. We maintained strong on-time delivery rates and focused on serving our customers.
Todd: Importantly, while we tightly managed our expenses in the quarter, we did invest for the future, ensuring we maintain our leadership position in technology-led filtration.
Todd: Capital expenditures included investments in capacity expansion and new products and technologies. R&D investments continued across all segments.
Todd: We are committed to leveraging our robust free cash flow generation and strong balance sheet to continue targeted strategic investments, both organic and inorganic.
Now I'll provide some detail on second quarter sales.
Todd: In mobile solutions, total sales were $548 million, down 1% versus 2024.
Todd: Excluding currency, sales grew 1%. Aftermarket sales of $442 million were up 4% year-over-year, driven by low double-digit growth in the OE channel.
Todd: OE demand was particularly strong this quarter, and independent channel sales declined low single digits, but were roughly flat on a constant currency basis.
Importantly, independent channel sales strengthened as the quarter progressed.
Todd: With respect to first fit sales, off-road sales of $80 million were down 13% due to ongoing weakness in the agriculture market.
Todd: On-road sales of $25 million declined 24% driven by an exit from non-strategic product sales and a decrease in global truck production.
Now on China.
Todd: Mobile Solutions China sales increased 1% with aftermarket sales offsetting first bid softness.
Todd: Macro weakness continues in the region, however, we do believe we are near trough level.
Todd: We are also encouraged by market trends in off-road, including a recent large OEM program win, and what we believe is a structural shift towards larger and more sophisticated equipment, which bodes well for our technology-led products.
Turning to the industrial solutions and life sciences segments.
Industrial sales decreased 4% to $254 million.
Todd: Industrial Filtration Solutions, or IFS, sales decreased 8% to $208 million, driven by slower investments in CAPEC-based businesses and power generation project timing.
Todd: Aerospace and defense sales growth of 19% partially offset IFS weakness.
Todd: Life Sciences sales of $69 million grew 9% compared with the prior year due to ongoing strength in disk drive.
Todd: Overall, I'm encouraged by the results we were able to deliver this quarter and confident in our ability to achieve record earnings in fiscal 2025.
Todd: Now I will turn it over to Brad who will provide more details on the financials. Brad?
Brad Pogalz: Thanks, Todd. Good morning, everyone. Second quarter results reflect a team effort. Across the company, Donalds and colleagues banded together to prioritize opportunities and control we can, all while keeping an eye on the future by pushing forward our strategic initiatives.
Speaker Change: As I walk through some key points from the corridor, please keep in mind my profit comments will exclude the impact from the charges Sarika referenced earlier.
Speaker Change: At a high level, second quarter total sales were down about 1% versus 2024, currency was a headwind of approximately 2%, and pricing was a 1% benefit.
Disciplined expense control drove operating margin of 40 basis points.
An EPS of 83 cents was 3% above last year.
Speaker Change: Gross margin of 35.2% was flat to the prior year, with an unfavorable sales mix being fully offset by select input cost deflation.
Speaker Change: Operating expenses or rate of sales was 20% compared with 20.4% a year ago.
Speaker Change: With this strong leverage, driving operating margin up 40 basis points to 15.2%.
Speaker Change: In terms of segment profitability, Mobile Solutions' pre-tax profit margin was 17.4 percent, down 60 basis points year-over-year, driven primarily by an unfavorable sales mix and expense-to-leveraging.
Speaker Change: Similarly, expense-to-leveraging on softer sales brought the industrial solutions pre-tax margin down 190 basis points to 16.1%.
Speaker Change: As we mentioned last quarter, we expect industrial pre-tax profit margins to improve throughout the year, supported by the execution of our projects in backlog and leverage on higher sales.
Speaker Change: Life Sciences had a pre-tax loss of approximately $500,000 in the quarter, which is less than 1% of the rate of sales and significantly better than the prior year performance.
Speaker Change: The margin improvement was driven by cost optimization actions taken earlier this fiscal year, which were related to prioritization efforts. And we also benefited from leverage on higher sales.
Speaker Change: Now our updated fiscal 25 outlook. First on sales, we are forecasting full year total sales to be flat to up 4% versus the prior guidance of a 2% to 6% increase.
Speaker Change: Half of the change comes from an FX headwind, which is disproportionately weighted to the second half of the fiscal year. We also factored in the impact from softer than expected end markets, particularly in agriculture and some of our industrial and life sciences project-based businesses.
We continue to expect a pricing benefit of approximately 1%.
Speaker Change: 100 basis points below our previous expectation, driven by ongoing weakness in the agriculture market.
Speaker Change: As such, the only change we made to our mobile solutions forecast is an off-road, where sales are now projected to be down mid-single digits versus our previous guidance of a low single digit increase.
Speaker Change: Our on-road forecast is unchanged at a low double-digit decrease due to a decline in global truck production.
Speaker Change: We continue to project growth in aftermarket, with sales up low single digits, stemming from strong demand in the OEM channel and market share gains in the independent channel.
Speaker Change: In industrial solution, sales are projected to increase between 1% and 5% versus an increase of 4% to 8% in our previous guidance.
Speaker Change: IFS sales are forecast to grow low single digits, down from our prior high single digit expectation as market conditions have weakened and capital spending on new equipment in areas such as dust collection has slowed.
Speaker Change: Aerospace and defense sales are projected to increase in the high single digits.
Speaker Change: Up from our previous black guidance, as robust and market conditions continue.
Speaker Change: For Life Sciences, we now project sales will increase in the high single-digit range compared with the low double-digit increase previously.
Speaker Change: Growth in our larger businesses, disk drive, and food coverage is partially offset by ongoing weakness in bioprocessing.
Speaker Change: With respect to life sciences profitability, we continue to expect we'll be breakeven for the full year, reflecting modest profitability in the second half.
Speaker Change: On a consolidated profit basis, we plan to more than offset sales pressure with disciplined expense management.
Speaker Change: As such, we are increasing the midpoint of our operating margin guidance range by 20 basis points.
bringing the full year forecast between 15.6% and 16%.
Speaker Change: The midpoint of this range is 15.8%, which is up 40 basis points from last year and clearly demonstrates our focus on expanding our margin profile.
Speaker Change: In terms of adjusted EPS, we are tightening our guidance range to between $3.60 and $3.68 per share.
Speaker Change: The midpoint of this range is in line with our previous guidance and represents a 6% year-over-year increase.
Speaker Change: Before moving to the cash flow forecast, I want to touch on the topic of tariffs.
Speaker Change: The situation is dynamic and there is still a high level of uncertainty and ambiguity regarding global pair of policies.
Speaker Change: Because of that, our guidance does not include any adjustments related to newly announced tariffs, but I want to stress that we are prepared to act.
Speaker Change: I'll talk more about our plans in a moment, but first I want to make a couple points about how our operating structure creates some natural hedging. To start with, the U.S. is a net exporter of products.
Speaker Change: Next, we have often talked about our region to support region manufacturing and distribution network. What that means is that about 75% of goods produced in a certain region stay in that region.
Speaker Change: Given these organic hedges, our biggest exposure to incremental tariffs is more limited to goods we ship from Mexico to the U.S.
Speaker Change: If specific tariffs are enacted, we have plans to mitigate those impacts through a combination of supply chain and price adjustments, including the application of surcharges. We will certainly quantify any meaningful impact if we see that emerge.
Now onto the Balance Sheet and Cash Flow Outlook.
Speaker Change: Our capital expenditures are forecast between $85 million and $100 million.
Speaker Change: with a majority tilted towards growth initiatives, including capacity expansion, new product development, and technology projects.
Speaker Change: Cash conversion is expected to be in the range of 85% to 95%.
Speaker Change: On par with historical averages, and we project cash conversion in the second half will be higher than the first half due to normal seasonality and a reduction in working capital, namely inventory, as we continue to work down our backlogs.
Lastly, on capital deployment, our priorities are unchanged.
Speaker Change: First, we invest. We are a growing Donaldson company, organically through capital investment and inorganically through strategic M&A with a focus mainly on life sciences and industrial services.
Speaker Change: We pay dividends. Our membership in the S&P High Yield Dividend Aristocrat Index is important to us, and we intend to maintain our status. Calendar 2024 marked Donaldson's 69th consecutive year of paying a quarterly cash dividend, and the 29th year in a row of annual dividend increases.
Thank you. Thank you. Thank you.
Finally, we repurchased shares.
Speaker Change: We expect to repurchase between 2% and 3% of our outstanding shares this year, consistent with prior guidance, and slightly above our average over the last several years of about 2%.
Speaker Change: In closing, the outcome of our team's effort this quarter was strong margin performance, a higher full-year margin projection, and an earnings forecast that remains at a record level.
Speaker Change: We recognize the work is not done, but I am confident that the Donaldson team is prepared to deliver. Now I'll turn the call back to Todd.
Thanks, Brad.
Speaker Change: When we held our Investor Day in April of 2023, we laid out our long-term strategic vision and fiscal 2026 financial targets.
Speaker Change: The close of this second quarter marks the halfway point to our three-year journey.
Speaker Change: Despite difficult conditions in many of our end markets, we have delivered on our expectations through the hard work and commitment of the Donaldson team, executing our strategy while making timely tactical adjustments along the way.
Speaker Change: As the leader in technology-led filtration, we have and continue to position ourselves to consistently create value for our shareholders through market share gains in many key businesses and through record earnings results.
Speaker Change: We intend to remain on this trajectory by continually evolving to meet the needs of our expansive and diversified customer base.
Speaker Change: Our earnings, combined with our robust balance sheet, allow for continued, focused investments in growth initiatives as we build on our success. Across all three segments, our R&D and CapEx investments are aimed at driving sales and efficient execution.
Our M&A pipeline is robust and strategically focused.
Speaker Change: Finally, I want to thank our talented employees for helping us build our future. I'm proud of the work they do and I'm impressed by their unwavering dedication.
Speaker Change: With that, I will now turn the call back to the operator to open the line for questions.
Speaker Change: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue.
Speaker Change: And if you'd like to withdraw that question, again, press star 1. Thank you. Our first question comes from the line of Brian Blair with Oppenheimer. Please go ahead.
and Adam Farley. Thank you. Thank you.
Thank you. Good morning, everyone.
Speaker Change: I thought you called out a recent win in China that's perhaps reflective of a structural shift that works in Donaldson's favor. I found that comment very intriguing. It would be great to hear more about the noted win and more importantly the implications of that and what
Speaker Change: you know, the decided, you know, shift, transition could mean for Donaldson going forward.
It's just a continuation of Technology Wins for us.
Speaker Change: within the overall sector of China. Remember we've been talking for a number of quarters of really bringing our technology-based platform, proprietary razors, to sell razor blades across that particular
Speaker Change: sector and we have done that. This particular one happens to be in the liquid sector and hydraulics specifically for tractors and so you see us now getting traction within that in a type of a type of an application in addition to the momentum that we have on air-based applications.
Thank you for watching!
Speaker Change: Understood. Appreciate the color. And a level-setting question within life sciences, if we were to...
Speaker Change: you know simplify the the segment to you know disk drives, food and bed by
or even just bioprocessing and
you know, legacy applications.
What is the split of profitability at this point?
Speaker Change: The impetus here is trying to gauge as you gain scale, you have top line inflection in bioprocessing, what that's going to mean on a run rate basis.
Yeah, that business.
Speaker Change: is on the trajectory that your team is targeting. So the way to think about that is, if you take the traditional businesses that we had, they're all profitable.
and more positive.
Speaker Change: Brian, this is Brad. I'll just add a point and reference back to my remarks to remember in first quarter we did some restructuring and
That was all about prioritization within the specific business.
Speaker Change: As Todd mentioned, we have a project pipeline that we're working on to bring some of these items from pre-revenue to revenue, and so the teams have done really good work to try and sharpen the pencil on where are we really going to invest, and that's giving us some momentum in life sciences profitability as well.
Thank you. Thank you. Thank you.
Understood. Appreciate the call.
Speaker Change: Your next question comes from the line of Rob Mason with Baird. Please go ahead.
Rob Mason: Yes, good morning all. The first question is around the mobile solution, just the aftermarket in general. There's a couple of quarters now we've seen a
Rob Mason: You know, meaningful divergence between the OED channel and the independent channel.
Rob Mason: And I was just curious, you know, what better explains that, if that's just, you know, focus from the OEDs on their parts business or share gains, what have you?
Rob Mason: That's one, and then the second question, still in the aftermarket, is I know you didn't change the outlook there, but it doesn't look like, you know, for the second half there's much in the way of normal seasonality built into the guidance, and I'm just curious if that's conservatism or if that's, you know, reflecting, you know, somewhat underlying weaker demand, or are you...
How are you viewing that?
Speaker Change: Yeah, sure. So, when you look at our aftermarket business, what ended up happening here...
Speaker Change: Within a quarter is a little bit of a shift in the behavior between the independent and the OE channel. The OE channel clearly has some more focus from the OEs on their parts-based businesses, as you call out. We clearly see that and we see that in a little bit more demand from that side. On the independent channel, which is, if I remind you, it is about 60% of the overall business, that felt a little bit more of a pullback, a little bit more cautious tone.
and, you know, NetNet, we were up.
Speaker Change: Now that's kind of some interesting adjustments for us that we see in the behavior changes.
Speaker Change: However, the story remains for us as Sharegains and how we continue to execute really, really well. Our fill rates are near 100% of when the customer wants the product.
Speaker Change: We're doing very well within that channel, servicing that channel, and we're very happy overall with where we are.
Speaker Change: Now, we didn't change the guide, but we didn't change the guide because, you know, one basically offsets the other, and so that it felt about a push.
Speaker Change: Understood. And just, you know, as a follow-up, you just talked, Todd, just around the visibility in IFS, you know, understand that can be lumpier with the projects.
Speaker Change: that move around and you did pull the guy down there but how are you I guess risk adjusting for those projects in the second half of the year and you know are those biased either to power gen
Speaker Change: Which my impression is that maybe those could be larger or the dust collection business.
Speaker Change: Yeah, so PowerGen is clearly the largest of its projects, and they move from quarter to quarter.
Speaker Change: based upon site availability, etc. We did see movement on power generation.
Speaker Change: It is about half, that represents about half of the down in the quarter, if you will, year over year, but those move out. And so, consequently, that revenue will come, but in the quarter, it's clearly a notable headwind. Our third generation business remains very strong. We expect it to remain strong at minimum for another year, year and a half.
Speaker Change: We have that much visibility, so very, very positive things. That's not really...
Speaker Change: the story here for us in The Change of the Guide.
Speaker Change: because we're still very bullish on power generation. The story really for us is in our capital-based project businesses that are more related to manufacturing. Specifically, we saw some movements within what we would say is the automotive arenas of that particular business where projects really pulled back, and you could say that's more related to an electrification type of a situation.
We're also in our vehicle electrification programs.
Speaker Change: supporting automotive for specifically electric cars in inventing based applications where that also felt a lot of pullback. So electrification really in the automotive sector really explains a lot of that and you know we did not see that meaningful shift.
forthcoming, but it certainly happened within a quarter.
I see. Very good. I'll turn it back. Thank you.
Speaker Change: Your next question comes from the line of Brian Drab with William Blair. Please go ahead.
Thank you.
Brian Drab: Hi, good morning. I think that you touched on this somewhat, but can you just further elaborate on the IFS?
segment that averaged about $210 million a quarter
Brian Drab: Is this project-based business, is that what's driving this big step up to, you know, the guidance implies going to more like $250 million a quarter in the second half?
Brian Drab: Yeah, so it's clearly project-based. And again, Brian, so the Power Generation business really saw timing move. It explains about half of the reduction in this quarter. But those project-based businesses for Power Generation moved. They just moved into the next quarter, the third or fourth quarter. And in fact, currently in the company within Power Generation, we did not change our annual guide for that business at all.
Brian Drab: Okay, so that's all, that's the power, that's all power generation.
Speaker Change: Okay, thanks. The call is actually cutting in in and out a little bit so I'm not catching everything so sorry if I asked something that was...
Speaker Change: If I'm repeating a question. No, don't worry. On the aerospace and defense side...
Speaker Change: Can you talk a little bit about where the, you know, particular strength is there, you know, more on the aerospace, more on the defense side, and just kind of give us a little more granularity there. Thank you.
Give us headwinds and therefore a flat.
Speaker Change: The supplier, of course, that we do have has actually improved performance.
Speaker Change: to a little bit of our surprise but but through some fantastic work of hard work of our people here working with that supplier and and so consequently that's
Speaker Change: That's why it's up. You know, the backlog has always been there, the orders have always been there. It was more of a reflection of the supply chain, and with us now knocking down some of those supply chain hurdles, that's what you're seeing in the guy.
Speaker Change: Your next question comes from the line of Laurence Alexander with Jeffreys. Please go ahead.
Laurence Alexander: Good morning. Just a question about the dynamics you're seeing off-road, I guess two parts.
Laurence Alexander: One, to what degree are the auto OEMs talking about, if there are tariffs, that it triggers the destock cycle, or do they see sort of a bit of a pre-buy to get ahead of it? Can you just give a sense for kind of, do you see kind of the initial impact?
Laurence Alexander: kind of which way it swings. But then secondly, when you think about your overall outlook adjustment for this year,
Laurence Alexander: How much of that do you think is lost demand as opposed to pent-up demand that comes back in 2026?
Speaker Change: Yeah, so let me take the first one. Within the opera sector,
Speaker Change: You know, we have not had pre-buys, we have not had any of those kind of activities out of our customers as a result of any of the tariff type of activities that's...
Speaker Change: You know, remember, some of those off-road markets like ag are really difficult for them.
Matt Marshall: Matt Marshall, Scott Robinson, Clayton insider, Drayvin, Matt Fossear, and Aaron Larson who
Matt Marshall: relative to manufacturing and delivering for them. I would say that the one change that maybe has happened or accelerated in the behavior is
Matt Marshall: asking, specifically always asking us, our capability of building their products outside the United States. As Brad said in his
Matt Marshall: in his script that, you know, we are a net exporter from the U.S.
Matt Marshall: And so, to the extent that OEs will want to have us rotate and build it more closely to their factories rather than have it in the U.S. and export it, you know, we have received questions regarding that.
Matt Marshall: That's the only behavioral change, really. And then the second question...
Matt Marshall: It's just around to what degree do you see kind of the...
Matt Marshall: Slightly softer near-term outlook being kind of a sign of pent-up demand for next year, or is it just we're resetting the level?
Matt Marshall: Right, right. You know, that's really tough to say because, you know, we're really being driven by the end markets. Nobody's...
Matt Marshall: No one is behaving differently as a result of the uncertainties that are clearly being introduced into the business markets, if you will. And so, to suggest that people are holding back or pulling forward.
Matt Marshall: That's not what we're seeing at all. Now, that's not to suggest that it won't happen, but, you know, for us, that's...
Matt Marshall: That's not the macro that we see and for our guide, we're taking what we know and we apply that within today's guidance.
Thank you.
Speaker Change: Your next question comes from the line of Angel Castillo with Morgan Stanley. Please go ahead.
Speaker Change: Hi, good morning. This is actually Stefan Diaz sitting in for Angel. Thanks for taking my question.
Speaker Change: Maybe if we could dig back into mobile solutions after market growth, would you be able to parse out share gains versus market growth? And then maybe, what sort of line of sight do you have into share gains continuing into your fiscal 26?
Speaker Change: So, you know, as a macro, you know, we have internal models to really track us against competition, etc. The benefit for us is...
Speaker Change: We are winning share gains, and we have won share gains, you know, quarter after quarter after quarter. And so we're really very, very proud of our international market team and what's taking place out there. And we expect those share gains to continue looking forward.
Speaker Change: Great, thanks. And then, I believe last quarter you mentioned some CAPEX projects being pushed out within Life Sciences. Can we have an update there? Like, has there been any step change, you know, in either bringing projects back forward or maybe pushed out even further? Thanks.
Speaker Change: Yeah, so you remember in life sciences, specifically in the bioprocessing, you have an upstream process and you have a downstream process. And those larger projects are in the upstream process, specifically with bioreactors and activities like that. Last year, we had very large projects, you know, five, six, seven million dollar projects that were in flight. Those have now shifted, giving us tougher comps as we look ahead within life sciences in the second half.
Speaker Change: And this is the reason why our commentary says that it's certainly more guarded in that industry because those projects have not been replaced. And large life sciences companies are not kicking off the multiple million dollar CapEx-based projects. And specifically our Solaris business tells us that. So we've not seen, you know, green shoots in that area at this point.
Speaker Change: But, you know, we'll continue to press forward and, you know, manage our business appropriately.
Great. Thanks for the call. I'll turn it over.
Speaker Change: Your next question comes from the line of Nathan Jones with Stiefel. Please go ahead.
Good morning, this is Adam Farley on Fort Nation.
I wanted to start on...
Hey, good morning, guys. I wanted to start on the...
Speaker Change: Operating margins within mobile, you know, how should we think about margins?
Speaker Change: for the remainder of the year, I think in the quarter, called out a little bit of a mixed headwind, but with aftermarket growth, how should we think about margins?
Adam, this is Brad.
Speaker Change: All three segments pick up from here at this point if you look second half versus first half. So some of it comes with the natural leveraging on sales and then some of it comes with the quality of the work that the teams have done around the company to be smart about where we're pulling out expenses.
Speaker Change: Just a side note on that, there isn't a mandate that says take X percent out, it's teams reflecting what they need in certain regions or in certain businesses and then prioritizing that. So I think that's where you'll see this tick up, again, it's across the company.
Thank you.
Thank you. Thank you.
Brad Pogalz: All right, thanks for that, Brad. You know, turning back to industrial...
Speaker Change: and your Connected Solutions. Are you seeing any changes there on the adoption rate, just given some of the, I don't know, it sounds like there might be some deceleration in industrial markets.
Speaker Change: Yeah, so we are. We've actually picked up our overall connectivity. So, for example, year-to-date growth in connected machines alone is 30% so far through the first six months.
Speaker Change: and in facilities, so remembering a facility can have multiple machines, is 29%. So we're getting a broad adoption across the customer base as well as customers often put more than one machine on base. I can tell you a story that happened within a quarter that was very fun. One particular customer, I won't mention by name, but they contracted to hook up all 60
Sarika Dhadwal.
Speaker Change: All of those are great examples of how you can do a lot of things quickly to hook them up. Keep in mind that each time we hook those up, what we have seen is an increase in customer relationships, the depth of that relationship, and more importantly, an increase in parts and replacement parts sales.
Speaker Change: So we're really proud of the efforts. We think we have really the best connected product out there and we'll continue to push forward that strategy.
Okay, great. Thank you for taking my questions.
Speaker Change: If you would like to ask a question, please press star 1 on your telephone keypad. Your next question comes from Brian Drab with William Blair. Please go ahead.
Brian Drab: Hi, I just want to ask one follow-up question. I was wondering, Todd, if you could talk about, you know, irrespective of what's happening in the life sciences market and the challenges there, how is the development of the technology going, just kind of the pipeline that you're working toward? Thank you. Thank you.
Brian Drab: developing for when the market improves, you know, within bioprocessing, therapeutics, the bioreactor products that you're developing, just how is the technology development going? Thanks.
Brad Pogalz: Yeah, so Brian, what we did, as Brad mentioned earlier, is we had a very broad agenda of products that we had in flight, all kind of fun ideas.
Brad Pogalz: And clearly, the market said, hey, you better focus, and so that's what we did do as a corporation. But those that we focused on, it's coming really nice. We really are pretty happy with the disruptive-based technologies that we have going forward. Still some time ahead of us before we bring those out to the market, but for example, we have some in
Brad Pogalz: in testing right now, so we're not, it's not years away, I would say it's quarters away and we've made significant progress.
Okay, thanks very much.
Rob Mason: Your next question comes from the line of Rob Mason with Baird. Please go ahead.
Rob Mason: Yes, thanks for taking the follow-up. Brad, you may have addressed this just a moment ago with your commentary around margins, but just maybe to put a finer point on it. It sounds like for the second half of the year, it looks like your guide implies about 50 basis points or so of year-over-year margin expansion. You're saying that we will see both gross margin expansion and OPEX leverage in the second half?
First versus second, yes.
Now again, the OPEX leverage will be a bigger...
and Hal.
Speaker Change: I'm sorry Brad, you broke up for me a little bit.
Yeah, but the first half...
Speaker Change: It will improve in the second half from the first half.
Speaker Change: Thank you for watching. I hope you enjoyed this video. I'll see you in the next video.
Speaker Change: And then I want to say operating expense leverage is a more meaningful contributor to that.
Speaker Change: Okay, because your SG&A in the second quarter was kind of unseasonably...
Speaker Change: You know low Does that carry forward or were there just some adjustments in the in the second quarter specifically?
Speaker Change: No, we expect that to carry forward. So we've got lower headcount year over year. We've got a real focus on any sort of discretionary activities.
Speaker Change: Again, it's really broad-based. This is about the whole company sort of rallying around, you know, we have this unexpected FX headwind, for example, that we have to address and we're pulling down where it makes sense and prioritizing.
Understood. Okay. Thank you.
Thank you. Thank you. Thank you.
Speaker Change: That concludes our question and answer session and I will now turn the conference back over to Tod Carpenter for closing comments.
Speaker Change: That concludes the call today. Thanks to everyone who participated. We look forward to reporting our third quarter fiscal 2025 results in June.
Have a great day. Goodbye.
Speaker Change: Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation and you may now disconnect.