Q3 2025 Donaldson Co Inc Earnings Call
Operator: All right, I'm transferring live in 5, 4, 3, 2. Good morning and welcome to Donaldson's third quarter fiscal 2025 earnings conference call and webcast.
Alright, I'm transferring live in five or three to one.
Speaker Change: Good morning, and welcome to Donaldson's third quarter fiscal 2025 earnings conference call and webcast.
Operator: All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star one on your telephone keypad. Today's conference is being recorded.
All lines will be needed during the presentation portion of the call with an opportunity for questions and answers at the end.
You'd like to ask a question. Please press star one on your telephone keypad.
Today's conference is being recorded.
Sarika Dhadwal: I would now like to turn the call over to Sarika Dhadwal, Senior Director of Investor Relations at ESG. Please go ahead. Good morning.
Speaker Change: I would now like to turn the call over to circa Dod wall Senior director of Investor Relations at ESG. Please go ahead.
Sarika Dhadwal: Thank you for joining Donaldson's third quarter fiscal 2025 earnings conference call.
Speaker Change: Good morning, Thank you for joining Donaldson's third quarter fiscal 'twenty 25 earnings Conference call with me today are Tod Carpenter, Chairman, President and CEO, and Brad Pogos Chief Financial Officer.
Sarika Dhadwal: With me today are Tod Carpenter, Chairman, President and CEO, and Brad Pogalz, Chief Financial Officer. This morning, Todd and Brad will provide a summary of our third quarter performance and our updated outlook for fiscal 2025. During today's call, we will discuss non-GAAP or adjusted results. For third quarter 2025, non-GAAP results exclude pre-tax charges of $62 million for the impairment of certain intangible assets for our two upstream bioprocessing businesses, Universal Technologies, and Solaris. Results also exclude pre-tax charges of $4.2 million for restructuring related to footprint optimization and cost reduction initiatives, $800,000 for business development, and a $1.2 million gain on the sale of fixed assets.
Speaker Change: This morning, Todd and Brad will provide a summary of our third quarter performance and our updated outlook for fiscal 'twenty 'twenty five.
Speaker Change: During today's call, we will discuss non-GAAP or adjusted results for third quarter 2025, non-GAAP results exclude pre tax charges of 62 million for the impairment of certain intangible assets for our two upstream bio processing businesses Universal's technologies and Soliris.
Speaker Change: Results also exclude pre tax charges of $4 2 million for restructuring related to footprint optimization and cost reduction initiatives 800000 for business development and a 1.2 million dollar gain on the sale of fixed assets a reconciliation of GAAP to non-GAAP.
Sarika Dhadwal: A reconciliation of gap to non-gap metrics is provided within the schedules attached to this morning's press release.
Speaker Change: Metrics is provided within the schedules attached to this morning's press release. Additionally, please keep in mind that any forward looking statements made during this call are subject to risks and uncertainties, which are described in our press release and SEC filings with that I will now turn the call over to Todd.
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 filings.
Tod Carpenter: With that, I will now turn the call over to Todd. Thanks, Sarika. Good morning. This quarter, the Donaldson team once again showcased our ability to deliver record sales and record-adjusted earnings withstanding macro uncertainty, including fluid tariff policies and end-market pressures. Supported by the durability and strength of our razor-to-sell razorblade model, excluding currency impact, we grew sales in all three segments. I am proud of our results. With our solid financial performance, the strength of our balance sheet, and an unwavering confidence in our ability to create long-term value, we repurchased an above-average number of shares in the quarter.
Todd: Thanks Sarka good morning.
Todd: This quarter the Donaldson team once again showcased our ability to deliver record sales and record adjusted earnings withstanding macro uncertainty, including fluid tariff policies and the end market pressures supported by the durability and strength of our razor to sell razorblade.
Speaker Change: Model, excluding currency impact we grew sales in all three segments I am proud of our results with our solid financial performance the strength of our balance sheet and an unwavering confidence in our ability to create long term value, we repurchased an above average number.
Speaker Change: <unk> of shares in the quarter.
Tod Carpenter: In addition, last week we announced an 11% increase in our quarterly dividends. Donaldson Company is in a position of strength. Earnings growth has outpaced sales growth for seven quarters in a row, due in large part to operating margin expansion. We continue to make long term investments in the company with sharp prioritization of technology opportunities and targeted capital expenditures. and we deploy a significant amount of cash to our shareholders through dividends and share repurchase. That has been our story, and that will continue to be our story.
Speaker Change: In addition, last week, we announced an 11% increase in our quarterly dividend.
Speaker Change: Donaldson company is in a position of strength.
Speaker Change: Earnings growth has outpaced sales growth for seven quarters in a row due in large part to operating margin expansion.
Speaker Change: We continue to make long term investments in the company with sharp prioritization of technology opportunities and targeted capital expenditures.
Speaker Change: And we deploy a significant amount of cash to our shareholders through dividends and share repurchase.
Speaker Change: That has been our story.
Speaker Change: And that will continue to be our story.
Tod Carpenter: Before getting into the highlights from this quarter, I would like to acknowledge yesterday's announcement on the appointment of Rich Lewis as Chief Operating Officer, effective August 1st. His current role as President of Life Sciences and his track record of delivering operational success throughout his 23-year Donaldson tenure, including as President of Mobile Solutions, positioned him well for success, and I look forward to partnering with Rich to further strengthen our execution across the organization.
Speaker Change: Before getting into the highlights from this quarter I would like to acknowledge yesterday's announcement on the appointment of rich Lewis as Chief operating officer effective August 1st his current role as President of life Sciences, and his track record of delivering operational success throughout his 23 year Donaldson tenure, including as president of <unk>.
Speaker Change: Abel solutions position him well for success and I look forward to partnering with rich to further strengthen our execution across the organization.
Tod Carpenter: Now I'll cover some highlights from this quarter within each of our segments. In mobile solutions, sales grew in constant currency driven by our aftermarket business as we continue to gain share and post solid growth across all regions and across both the OE and independent channel. As a reminder, recurring revenue from aftermarket parts makes up between 75 and 80% of sales in this segment. It is this solid foundation that helps us withstand the natural cycles in new equipment production.
Speaker Change: Now I'll cover some highlights from this quarter within each of our segments.
Speaker Change: In mobile solutions sales grew in constant currency driven by our aftermarket business as we continue to gain share and post solid growth across all regions and across both the OE and independent channels.
Speaker Change: As a reminder, recurring revenue from aftermarket parts makes up between 75 and 80% of sales in this segment.
Speaker Change: It is this solid foundation that helps us withstand the natural cycles in new equipment production. Additionally.
Tod Carpenter: Additionally, while our First Fit businesses are currently facing cyclical headwinds in more developed regions, we remain optimistic about growth in large and growing markets, such as India, due to recent winds. For industrial solutions, volume growth and pricing drove a solid sales increase and as expected, profitability improved sequentially, returning to above 18%, a level consistent with our long term target. Our aerospace and defense business continues to outperform with sales now at an all time high. The team has worked hard to navigate supply chain bubbles and deliver our technology-led products to our customers. Our connectivity strategy remains a priority, and we are in the final stages of launching our new technologies, including next generation controllers and gateways, which will enhance our offerings across industrial filtration solutions or IFS business.
Speaker Change: Additionally, while our first fit businesses are currently facing cyclical headwinds in more developed regions. We remain optimistic about growth in large and growing markets such as India due to recent wins.
Speaker Change: Our industrial solutions volume growth and pricing drove a solid sales increase and as expected profitability improved sequentially returning to above 18% a level consistent with our long term targets are.
Speaker Change: Our aerospace and defense business continues to outperform with sales now at an all time high.
Speaker Change: The team has worked hard to navigate supply chain bubbles and deliver our technology led products to our customers.
Speaker Change: Our connectivity strategy remains a priority and we are in the final stages of launching our new technologies, including next generation controllers, and gateways, which will enhance our offerings across industrial filtration solutions or iff's businesses, our services business is performing well.
Tod Carpenter: Our services business is performing well. And our most recent acquisition, EasyFlow, once again performed above our expectations this quarter and posted a record April. In life sciences, we are now operating with a leaner, more focused cost structure from which we are better positioned to leverage sales growth. Our larger legacy disk drive and food and beverage businesses are performing well, while our newer bioprocessing businesses are working to bring new products to market. Recall that our Isolair biobusiness in October of 2024 announced the availability of its research grade Isotag AAV reagent.
Speaker Change: And our most recent acquisition easy flow once again performed above our expectations this quarter and posted a record April.
Speaker Change: In life Sciences, we are now operating with a leaner more focused cost structure from which we are better positioned to leverage sales growth our larger legacy disk drive in food and beverage businesses are performing well, while our newer bio processing businesses are working to bring new products to market.
Speaker Change: Recall that our ISIL air Bio business in October of 2024 announced the availability of its research grade ISO tag AAV reagent.
Tod Carpenter: This quarter, we took another important step towards scaling and commercializing this product, announcing the availability of the Manufacturing Grade product, which is used to address bottlenecks in customers' good manufacturing processes, streamline purification, and bring certain gene therapies to patients in need.
Speaker Change: This quarter, we took another important step towards scaling and commercializing this product announcing the availability of the manufacturing grade product, which is used to address bottlenecks in customers good manufacturing processes, streamline purification and bring certain gene therapies to patients.
Speaker Change: In need.
Tod Carpenter: Now, some Consolidated Company highlights. Sales rose 1% year over year to $940 million where modest volume growth was offset by a currency translation headwind allowing pricing to push us forward.
Speaker Change: Now some consolidated company highlights.
Speaker Change: Sales rose, 1% year over year to $940 million were modest volume growth was offset by a currency translation headwind, allowing pricing to push us forward.
Tod Carpenter: Operating margin in the quarter improved 80 basis points over 2024 driven by expense leverage. Adjusted EPS was 99 cents, approximately 8% versus prior year.
Speaker Change: Operating margin in the quarter improved 80 basis points over 'twenty 'twenty four driven by expense leverage.
Speaker Change: Adjusted EPS was 99 cents.
Speaker Change: Approximately 8% versus prior year.
Tod Carpenter: I want to provide some additional details on Tariff. The impact of tariffs on this quarter's net results was immaterial, and based on what is implemented today, we expect the net impact on our profit to remain immaterial. The reason we have this view is because of how we operate.
Speaker Change: I want to provide some additional details on tariffs.
Speaker Change: The impact of tariffs on this quarter's net results was immaterial and based on what is implemented today, we expect the net impact on our profit to remain immaterial.
Speaker Change: The reason we have this view is because of how we operate structurally.
Brad Pogalz: Structurally, Donaldson is well-equipped to successfully navigate the current dynamic global tariff environment. Our operating model provides some natural hedging from tariff impact. First, about 75% of our footprint is region to support region manufacturing and distribution. Second, our largest exposure is from Mexico to the U.S., where approximately 85% of goods we ship are USMCA qualified, and our teams are working to accelerate additional qualifications where there are opportunities. Also, in thinking about Donaldson's tariff exposure, it is important to note the US is a net exporter. On an annualized basis, we estimate the total impact of tariff costs on Donaldson today to be around $35 million, which we expect to offset through supply chain and price adjustments, including the application of surcharge.
Speaker Change: Structurally Donaldson is well equipped to successfully navigate the current dynamic global tariff environment.
Speaker Change: Our operating model provides some natural hedging from tariff impacts.
Speaker Change: First about 75% of our footprint is region to support region manufacturing and distribution.
Speaker Change: Second our largest exposure is from Mexico to the U S, where approximately 85% of goods, we ship our U S. M. C. A qualified and our teams are working to accelerate additional qualifications, where there are opportunities.
Speaker Change: Also in thinking about donaldson's tariff exposure. It is important to note. The U S is a net exporter on an annualized basis, we estimate the total impact of tariff costs on Donaldson today to be around $35 million, which we expect to offset through.
Speaker Change: Fly chain and price adjustments, including the application of surcharges while.
Brad Pogalz: While navigating the ever changing tariff dynamics, our global operations teams focus on working down backlogs and delivering on customer commitment. Overall, on-time delivery rates remain at high levels.
Speaker Change: Navigating the ever changing tariff dynamics, our global operations teams focus on working down backlogs and delivering on customer commitments.
Speaker Change: Overall on time delivery rates remain at high levels.
Brad Pogalz: Throughout the quarter, we maintained expense discipline while still investing in strategically important areas. We focused our capital expenditures and R&D investments, which continued across all segments.
Speaker Change: Throughout the quarter, we maintained expense discipline, while still investing in strategically important areas, we focused our capital expenditures and R&D investments, which continued across all segments.
Brad Pogalz: During the quarter, we also released our fiscal 2024 sustainability report, which illustrates how our environment and social efforts are driving cost savings, strengthening customer relationships, and reinforcing our long term competitive. Key updates include our virtual power purchase agreement, where we teamed with PepsiCo to lower U.S. emissions. and a 2030 ambition to reduce landfill waste or increase recycling by 3,200 metric tons. These efforts align with the expectations of our global OEM and multinational customers, enhancing our ability to win and expand relations.
Speaker Change: During the quarter. We also released our fiscal 'twenty 'twenty four sustainability report, which illustrates how our environment and social efforts are driving cost savings strengthening customer relationships and reinforcing our long term competitiveness.
Speaker Change: He updates include our virtual power purchase agreement, where we teamed with Pepsico to lower U S emissions and a 2030 ambition to reduce landfill waste or increase recycling by 3200 metric tons.
Speaker Change: These efforts are aligned with the expectations of our global OEM and multinational customers enhancing our ability to win and expand relationships.
Brad Pogalz: Now I'll provide some detail on third quarter sales. In mobile solutions, total sales were $583 million, roughly flat with prior year. aftermarket sales were $460 million, a 3% increase driven primarily by mid single digit growth in our OE channel. independent channel sales were up low single digits from market share gain.
Speaker Change: Now I'll provide some detail on third quarter sales.
Speaker Change: In mobile solutions total sales were $583 million roughly flat with prior year.
Speaker Change: Aftermarket sales were $460 million eight 3% increase driven primarily by mid single digit growth in our OE channel.
Speaker Change: Independent channel sales were up low single digits from market share gains.
Brad Pogalz: In our first fit businesses and market pressures continue.
Speaker Change: In our first fit businesses and market pressures continue off road sales were $96 million down 8% and on road sales of $27 million declined 25%, primarily due to ongoing and well documented weakness in the transportation and agriculture.
Brad Pogalz: Off-road sales were $96 million down 8% and on-road sales of $27 million declined 25% primarily due to ongoing and well-documented weakness in the transportation and agriculture market.
Speaker Change: Markets.
Brad Pogalz: touching on China for a moment. Mobile Solutions China sales were a bright spot in the quarter, increasing 27% from growth in both first fit and aftermarket. We are pleased with the momentum we are seeing, particularly in off-road, as a structural shift to larger, more sophisticated equipment is driving demand for our products. We're optimistic about our long term growth potential.
Speaker Change: Arching on China for a moment.
Speaker Change: Mobile solutions, China's sales were a bright spot in the quarter, increasing 27% from growth in both first fit and aftermarket.
Speaker Change: We are pleased with the momentum we are seeing particularly in off road as a structural shift to larger more sophisticated equipment is driving demand for our products. We are optimistic about our long term growth potential.
Brad Pogalz: Turning to industrial solutions, industrial sales rose 5% to $283 million. IFS sales were $232 million, a 1% increase from prior year, with replacement parts sales strength in several key businesses, including power generation, industrial hydraulics, and industrial services, offsetting new equipment decline. Aerospace and defense sales grew to a record $52 million, largely from robust aerospace market In life sciences, sales of $74 million grew 1% compared with prior years. Double digit sales growth in disk drive and food and beverage replacement parts was partially offset by timing of bioprocessing sales as we had significant project shipments in last year's third quarter.
Speaker Change: Turning to industrial solutions industrial sales rose, 5% to $283 million.
Speaker Change: <unk> sales were $232 million, a 1% increase from prior year with replacement parts sales strength in several key businesses, including power generation industrial hydraulics, and industrial services offsetting new equipment declines.
Speaker Change: Postpaid and defense sales grew to a record $52 million largely from robust aerospace market demand.
Speaker Change: In life Sciences sales of $74 million grew 1% compared with prior year.
Speaker Change: Double digit sales growth in disk drive and food and beverage replacement parts was partially offset by timing of bio processing sales as we had significant project shipments in last year's third quarter.
Brad Pogalz: Overall, I'm very pleased with the results we delivered and look forward to a strong fourth quarter.
Speaker Change: Overall I'm very pleased with the results, we delivered and look forward to a strong fourth quarter.
Brad Pogalz: fiscal 2025 is forecasted to be another record year for Donald Record Sales, Record Operating Margin, and Record Adjusted Earnings.
Speaker Change: Fiscal 'twenty twenty-five is forecasted to be another record year for Donaldson.
Speaker Change: Record sales record operating margin and record adjusted earnings.
Brad Pogalz: Now I'll turn it over to Brad, who will provide more details on the financials. Thanks, Todd. Good morning, everyone. We're pleased with our third quarter results. Sales were up due to the strong foundation of recurring revenue and the diverse mix of businesses and geographies where we operate. Profit was up due to revenue growth, expense discipline and prioritized investments.
Speaker Change: Now I'll turn it over to Brad who will provide more details on our financials Bret.
Brad Pogos: Thanks, Todd Good morning, everyone. We're pleased with our third quarter results sales were up due to the strong foundation of recurring revenue and the diverse mix of businesses and geographies, where we operate profit was up due to revenue growth expense discipline and prioritized investments and we made notable contributions.
Brad Pogalz: And we made notable contributions to shareholders via repurchase and our recently announced dividend I want to thank my colleagues around the world who stay focused on our customers and our opportunities for growth amidst this uncertain environment. It's no easy task and they do these things while keeping a close eye on expenses, profitability and cash, which makes us the strong company we are.
Brad Pogos: To shareholders via a repurchase and our recently announced dividend increase.
Speaker Change: I want to thank my colleagues around the world, who stay focused on our customers and our opportunities for growth amidst this uncertain environment.
Speaker Change: No easy task and they do these things, while keeping a close eye on expenses profitability and cash which makes us a strong company we are.
Brad Pogalz: Before going through the details on our performance, I want to touch on the charge we took in the quarter for an impairment of intangible asset. The charge relates to our two upstream bioprocessing businesses, Universell Technologies and Solaris. As we have discussed over the last several quarters, results have been pressured by market headwinds, including weak capital spending and longer than expected drug development timeline. The situation has not improved with an elongated ramp up in sales and profitability, ultimately leading to an impairment.
Speaker Change: Before going through the details on our performance I want to touch on the charge, we took in the quarter for an impairment of intangible assets the.
Speaker Change: The charge relates to our two upstream bio processing businesses, Universal's technologies and Soliris as.
Speaker Change: As we have discussed over the last several quarters' results have been pressured by market headwinds, including weak capital spending and longer than expected drug development timelines.
Speaker Change: The situation has not improved with an elongated ramp up in sales and profitability ultimately leading to an impairment.
Brad Pogalz: That said, we still believe the bioprocessing market presents great opportunities for us, and we will continue to make strategic investments as we look for ways to develop and commercialize new disruptive technologies.
Speaker Change: That said, we still believe the bio processing market presents great opportunities for us and we will continue to make strategic investments as we look for ways to develop and commercialize new disruptive technologies.
Brad Pogalz: Now turning to a few highlights from the quarter. Note that my profit comments will exclude the impact from the items Sarika referenced earlier. Total sales increased 1%, driven by pricing and volume growth, partially offset by a headwind from currency translation. expense leverage drove operating margin up 80 basis points and adjusted EPS of 99 cents was 8% above the prior year. Going further into the P&L, gross margin was 34.5%, a decrease of 110 basis points from last year, mainly as a result of higher manufacturing costs. including those related to footprint optimization.
Speaker Change: Now turning to a few highlights from the quarter note that my profit comments will exclude the impact from the items Sarika referenced earlier.
Speaker Change: Total sales increased 1% driven by pricing and volume growth, partially offset by a headwind from currency translation expense leverage drove operating margin up 80 basis points and adjusted EPS of <unk> 99 cents was 8% above the prior year.
Speaker Change: Going further into the P&L gross margin was 34, 5% a decrease of 110 basis points from last year, mainly as a result of higher manufacturing costs, including those related to footprint optimization initiatives.
Brad Pogalz: While these projects pressure gross margin in the near term, we are confident they will enhance our long-term profitability.
Speaker Change: While these projects pressure gross margin in the near term we are confident they will enhance our long term profitability.
Brad Pogalz: I also want to repeat a point Todd made about tariffs. The impact on gross margin in third quarter was negligible, and the total annualized impact from the current tariffs is estimated at less than one percent of sales, which is something we believe we can offset. We recognize the importance of this topic.
Speaker Change: I also want to repeat a point Todd made about tariffs the impact on gross margin in third quarter was negligible in the total annualized impact from the current tariffs is estimated at less than 1% of sales, which is something we believe we can offset we recognize the importance of this topic. So we <unk>.
Brad Pogalz: So we wanted to make it clear where we stand today.
Speaker Change: Wanted to make it clear where we stand today.
Brad Pogalz: Back to the P&L. Third quarter operating expense as a rate of sales improved to 18.2% from 20.1% a year ago. The favorability was driven by a handful of We had a reversal of an earn out reserve for our pure logics business within life sciences.
Speaker Change: Back to the P&L third quarter operating expense as a rate of sales improved to 18, 2% from 21% a year ago. The favorability was driven by a handful of things we had a reversal of an earn out reserve for a pure logics business within life Sciences, and we also had lower warranty expense.
Brad Pogalz: And we also had lower warranty These factors were further complemented by our ongoing expense discipline, reflecting the sharp prioritization happening across the company. In terms of segment profitability, mobile solutions pre tax profit margin was 18.1% down 30 basis points year over year, mainly due to higher manufacturing costs, and including those related to footprint optimization projects. Industrial Solutions pre-tax margin was also 18.1%, down 60 basis points, largely as a result of unfavorable regional end product sales mix.
Speaker Change: <unk>.
Speaker Change: These factors were further complemented by our ongoing expense discipline, reflecting the sharp prioritization happening across the company.
Speaker Change: In terms of segment profitability mobile solutions pre tax profit margin was 18, 1% down 30 basis points year over year, mainly due to higher manufacturing costs and including those related to footprint optimization projects.
Speaker Change: Industrial solutions pre tax margin was also 18, 1% down 60 basis points, largely as a result of unfavorable regional and product sales mix.
Brad Pogalz: life sciences pre tax margin improved notably to 7.8% mainly due to the previously mentioned earn out reversal for pure logics, which resulted from a longer than expected revenue surge. Life Sciences profit margin also benefited from the cost optimization initiatives launched earlier this year. While we expect market based headwinds in our bioprocessing business to continue, we are committed to making selective strategic investments, while leveraging the strength of our more mature life sciences business.
Speaker Change: Life Sciences pretax margin improved notably to seven 8%.
Speaker Change: Mainly due to the previously mentioned earn out reversal for pure logics, which resulted from a longer than expected revenue cycle life.
Speaker Change: Life Sciences profit margin also benefited from the cost optimization initiatives launched earlier this year, while we expect market based headwinds in our bio processing business to continue.
Speaker Change: We're committed to making selective strategic investments, while leveraging the strength of our more mature life sciences businesses.
Brad Pogalz: Now, our updated fiscal 25 outlook. First on sales, we are projecting a full year total sales increase between 1% and 3% in line with our prior guidance. Pricing is expected to contribute approximately 1%. And the impacts from both currency translation and tariffs are expected to be negligible. For mobile solutions, we're forecasting sales will be flat to up 2% consistent with our previous expectation, as higher margin aftermarket growth is being partially offset by ongoing first fit pressure.
Speaker Change: Now our updated fiscal twenty-five outlook first on sales we are projecting a full year total sales increase between 1% and 3% in line with our prior guidance.
Speaker Change: <unk> is expected to contribute approximately 1% and the impacts from both currency translation and tariffs are expected to be negligible.
Speaker Change: For mobile solutions, we're forecasting sales will be flat to up 2% consistent with our previous expectation as higher margin aftermarket growth is being partially offset by ongoing first fit pressure we.
Brad Pogalz: We did modify the on-road forecast with continued weakness in global truck production, resulting in a sales decline in the high teens versus low double digits. As a side note, I know transportation markets get a lot of attention due to the availability of public data. But I want to remind everyone that the on-road first fit part of our business hovers between only 3% and 5% of total sales. We like this space and our deep customer relationships give us confidence that our advanced technologies are excellent solutions now and into the future. But it's important to keep perspective on the impact these truck cycles have on our business.
Speaker Change: We did modify the on road forecast with continued weakness in global truck production, resulting in a sales decline in the high teens versus low double digits.
Speaker Change: As a side note I know transportation markets get a lot of attention due to the availability of public data, but I want to remind everyone that the on road first fit part of our business hovers between only 3% and 5% of total sales.
Speaker Change: We like this space and our deep customer relationships give us confidence that our advanced technologies are excellent solutions now and into the future, but it's important to keep perspective on the impact these truck cycles have on our business.
Brad Pogalz: Moving to off road, the sales guidance of a mid single digit decline stayed the same, primarily due to weak agriculture market. Our guidance for aftermarket sales is also unchanged at a low single digit increase versus the prior year, showing the resilience of this important category of business. In industrial solutions, sales are forecast to grow between 2% and 4%. in line with our previous expectations. We continue to expect IFS sales to increase low single digits, with replacement part growth offsetting slower sales of new equipment, which are being pressured by the uncertain economic environment.
Speaker Change: Moving to off road the sales guidance of a mid single digit decline stayed the same primarily due to weak agriculture markets our.
Speaker Change: Our guidance for aftermarket sales is also unchanged at a low single digit increase versus the prior year showing the resilience of this important category of business.
Speaker Change: In industrial solutions sales are forecast to grow between 2% and 4% in line with our previous expectation.
Speaker Change: We continue to expect <unk> sales to increase low single digits with replacement part growth offsetting slower sales of new equipment, which are being pressured by the uncertain economic environment.
Brad Pogalz: Aerospace and defense sales are now projected to increase in the low teens up from high single digits as robust market conditions in both aerospace and defense continue. In life sciences, our expectation of high single digit growth is unchanged. The positive momentum in our larger legacy businesses, disc drive and food and beverage continues to be partially offset by ongoing weakness and bioprocessing.
Speaker Change: Aerospace and defense sales are now projected to increase in the low teens up from high single digits as robust market conditions in both aerospace and defense continue.
Speaker Change: In life Sciences, our expectation of high single digit growth is unchanged the positive momentum in our larger legacy businesses disk drive in food and beverage continues to be partially offset by ongoing weakness in bio processing.
Brad Pogalz: Consistent with the guidance we laid out at the beginning of the year, we are forecasting full year segment profitability to be roughly breakeven. From a total company perspective, we are maintaining our forecasted operating margin at record levels between 15.6% and 16.0%. At the midpoint, this would be a 40 basis point year over year expansion, largely as a result of our continued focus on expense management. Our adjusted EPS guidance of $3.64 to $3.70 also reflects a record level. At the midpoint, we raised our forecast three cents from our previous guidance. implying a solid 7% year over year EPS increase that is built on a 2% sales increase.
Speaker Change: Consistent with the guidance, we laid out at the beginning of the year, we are forecasting full year segment profitability to be roughly breakeven.
Speaker Change: From a total company perspective, we are maintaining our forecasted operating margin at record levels between 15, 6% and 16.0% at the midpoint. This would be a 40 basis point year over year expansion largely as a result of our continued focus on expense management.
Speaker Change: Our adjusted EPS guidance of $3.64 to $3 70, <unk> also reflects a record level.
Speaker Change: At the midpoint, we raised our forecast three cents from our previous guidance, implying a solid 7% year over year EPS increase that is built on a 2% sales increase.
Brad Pogalz: Despite the economic environment, we demonstrate our ability to drive leverage, and we believe we could further expand that leverage when the economic conditions become more robust.
Speaker Change: Despite the economic environment, we demonstrate our ability to drive leverage and we believe we could further expand that leverage when the economic conditions become more robust in the meantime, we control what we can including those key aspects of capital deployment.
Brad Pogalz: In the meantime, we control what we can, including those key aspects of capital deployment. Ash conversion is expected to be in the range of 80% to 90% consistent with historical average. We look to finish the year with fourth quarter conversion higher than year-to-date levels due to normal seasonality and a reduction in working capital, primarily through lower inventory levels as our teams continue to navigate certain supply chains.
Speaker Change: Cash conversion is expected to be in the range of 80% to 90% this year consistent with historical averages.
Speaker Change: We look to finish the year with fourth quarter conversion higher than year to date levels due to normal seasonality and a reduction in working capital primarily through lower inventory levels as our teams continue to navigate certain supply chain issues.
Brad Pogalz: and then at a high level, strategic capital deployment is always on our mind. Investing for growth remains the top priority. We see opportunities within the company and outside via acquisition. Inside the company, our capital expenditures for this year are forecast between $75 million and $90 million. We are investing in future growth through capacity expansion, new product development, and technology projects. M&A is also an important lever in supporting our future growth. And we are still actively working a pipeline of opportunity. We are strategic and disciplined, with our focus remaining more squarely on opportunities within the life sciences and industrial markets.
Speaker Change: And then at a high level strategic capital deployment is always on our minds.
Speaker Change: Investing for growth remains the top priority, we see opportunities within the company and outside via acquisitions inside the.
Speaker Change: Company, our capital expenditures for this year are forecast between $75 million and $90 million, we are investing in future growth through capacity expansion, new product development and technology projects.
Speaker Change: M&A is also an important lever and supporting our future growth and we are still actively working a pipeline of opportunities.
Speaker Change: We are strategic and disciplined with our focus remaining more squarely on opportunities within the life Sciences, and industrial markets, but the timing of deals can be uncertain and that guides our actions.
Brad Pogalz: But the timing of deals can be uncertain. And that guides our action. We have to protect some level of liquidity to give us flexibility to act when the opportunity arises, and we do this well given the incredible strength of our balance. At the same time, we're committed to the ongoing return of cash to shareholders in a thoughtful and systematic manner.
Speaker Change: We have to protect some level of liquidity to give us flexibility to act when the opportunity arises and we do this well given the incredible strength of our balance sheet.
Speaker Change: At the same time, we are committed to the ongoing return of cash to shareholders in a thoughtful and systematic manner and I want to provide a couple of updates on that point.
Brad Pogalz: And I want to provide a couple of updates on that point.
Brad Pogalz: First, as Todd mentioned, last week we announced an 11% increase in our quarterly cash dividend. This level of increase is a testament to our strong operating performance today and our confidence in our future performance and financial strength. It's also worth highlighting that 2025 is forecast to be Donaldson's 30th year in a row of annual dividend increase. It's a massive accomplishment and limited to a small number of great companies, including our peers in the S&P High Yield Dividend Aristocrat Index.
Speaker Change: First as Todd mentioned last week, we announced an 11% increase in our quarterly cash dividend this level.
Speaker Change: All of increase is a testament to our strong operating performance today, and our confidence in our future performance and financial strength.
Speaker Change: It's also worth highlighting the 20th twenty-five is forecast to be donaldson's, 13th year in a row of annual dividend increases, it's a massive accomplishment and limited to a small number of great companies, including our peers in the S&P high yield dividend aristocrat index.
Brad Pogalz: We are proud to be part of this elite My second point on returning cash to shareholders. During the third quarter, we repurchased 2.4% of our outstanding shares for a total of $192 million, bringing our year to date repurchase to 3.3% of outstanding shares. With that level of buyback, we are now increasing our full year expectation to between three and a half and four percent. dividends and share repurchase are long standing components of our capital deployment priorities. And through these vehicles, we demonstrate our view that Donaldson has a strong foundation and excellent long term growth process.
Speaker Change: We are proud to be part of this elite group.
Speaker Change: My second point on returning cash to shareholders during the third quarter, we repurchased two 4% of our outstanding shares for a total of $192 million, bringing our year to date repurchase to three 3% of outstanding shares.
Speaker Change: With that level of buyback, we are now increasing our full year expectation to between three and a half and 4%.
Speaker Change: Dividends and share repurchase our longstanding components of our capital deployment priorities and through these vehicles, we demonstrate our view that Donaldson has a strong foundation and excellent long term growth prospects.
Brad Pogalz: In summary, we performed well so far this year. The outlook we provided today suggests that performance continues in fourth quarter, keeping us on track to deliver record sales and adjusted earnings in fiscal 2025.
Speaker Change: In summary, we performed well so far this year the outlook. We provided today suggest that performance continues in fourth quarter, keeping us on track to deliver record sales and adjusted earnings in fiscal 2025.
Tod Carpenter: Now I'll turn the call back to Todd. Thanks, Brad. Looking ahead, as I said in my opening comments, Donaldson is playing from a position of strength. And I'm confident that we are well positioned to deliver long term value through strategic investments, strong execution, and disciplined capital deployment. Our team's ability to navigate dynamic market conditions, while advancing innovation and growth initiatives gives me optimism as we drive forward to a robust future.
Todd: Now I'll turn the call back to Todd.
Todd: Thanks, Brad looking ahead as I said in my opening comments Donaldson is playing from a position of strength and I'm confident that we are well positioned to deliver long term value through strategic investments strong execution and disciplined capital deployment.
Todd: Our team's ability to navigate dynamic market conditions, while advancing innovation and growth initiatives gives me optimism as we drive forward to a robust future.
Tod Carpenter: With that, I'll now turn the call back to the operator to open the line for questions. Thank you.
Todd: With that I'll now turn the call back to the operator to open the line for questions.
Todd: Yes.
Operator: If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw any questions, press star one again.
Speaker Change: If you would like to ask a question. Please press star followed by the number one on your telephone keypad.
Speaker Change: There are any questions press star one again.
Angel Castillo: Our first question comes from Angel Castillo from Morgan Stanley. Please go ahead. Your line is open. Good morning and thanks for taking my question and congrats on a strong quarter.
Speaker Change: Our first question comes from Angel Castillo from Morgan Stanley. Please go ahead. Your line is open.
Angel Castillo: Good morning, and thanks for taking my question.
Angel Castillo: On the strong quarter, just wanted to maybe unpack a little bit more.
Angel Castillo: Just wanted to maybe unpack a little bit more if we could talk about kind of the gross profit margin dynamic. Particularly, I think there was a little bit of a step down here, I guess, and sequentially in year over year, and you talked about some of the pieces.
Angel Castillo: If we could talk about kind of that hit the gross profit margin dynamic, particularly I think there was a little bit of a step down here sequentially and year over year and you talked about some of the pieces.
Brad Pogalz: As you look forward, could you talk about kind of the ability to remain price-cost neutral and how you're seeing inflation more broadly in your business and perhaps also kind of clarify maybe how much was just due to footprint optimization initiatives and therefore might not repeat as we go forward? Hello? Angel, can you hear me? Yeah, we can hear you now. Okay, sorry about that. We've got some technical difficulties. Apologies to the group.
Angel Castillo: As you look forward can you talk about kind of the ability to remain price cost neutral.
Angel Castillo: How youre seeing inflation more broadly in your business and then perhaps also kind of quantify maybe how much was just due to footprint optimization initiatives and therefore might not repeat as we go forward.
Angel Castillo: [laughter].
Angel Castillo: Yes.
Angel Castillo: Hello.
Angel Castillo: Hello.
Angel Castillo: Okay.
Angel Castillo: Angela can you hear me.
Angel Castillo: Yes.
Angel Castillo: Okay, sorry about that got some technical difficulties apologies for the group.
Brad Pogalz: So, this is Brad. I want to start with the footprint. That was the majority of the decline in gross margin in the quarter. And I want to touch on that really quickly. I'll come back to your other comments about price cost. But as far as the footprint specifically, we're at a point of heavy lifting right now. We've got plant rationalization activities that we kicked off last year. So, one plant in the US is closing and going to another US state. We've got a plant in the UK that's closing and it's going to East Europe. So, this is about driving towards longer term opportunities.
Brad: So this is Brad I wanted to start with the footprint that was the majority of the decline in gross margin in the quarter and I want to touch on that really quickly I'll come back to your other comments about price cost, but as far as the footprint specifically, we're at a point of heavy lifting right now we've got plant rationalization activities that we kicked off.
Brad: Last year, so one plant in the U S is closing and going to another U S. State we've got a plant in the UK, that's closing and it's going to eastern Europe. So this is about driving towards longer term opportunities and thats, where the activities are happening right now as far as price cost we feel very good about our business our position to stay neutral on.
Brad Pogalz: And that's where the activities are happening right now. As far as price cost, we feel very good about our position to stay neutral on that. We continue to get price. Obviously, the mission for us is to be fair with our customers. We're a premium brand in the There's no change to our stance here. We will continue to make sure that we hold on to pricing where we can. That's very helpful.
Brad: That we continue to get price obviously the mission for US is to be fair with our customers. We're a premium brand in the markets and there's a lot of different pricing strategies, but overall, there's no change to our stance here, we will continue to make sure that we hit hold onto pricing, where we can.
Brad: That's very helpful and maybe if we could just expand a little bit more on the on the footprint side.
Angel Castillo: And maybe if we could just expand a little bit more on the footprint side as it relates to CapEx.
Brad: Relates to Capex.
Angel Castillo: You lowered the CapEx outlook for the year. Can you talk about maybe what's kind of driving that?
Brad: You lowered the Capex outlook.
Brad: For the year can you talk about maybe what's kind of driving that and as you think strategically kind of longer term in and given some of the administration's kind of proposed tax policies in Asia.
Tod Carpenter: And as you think strategically kind of longer term and given some of the administration's kind of proposed tax policies, any shift or potential kind of impact or benefits to your strategy and capital investments as we think kind of going forward or desired and perhaps, you know, in size or timing of or location of your investment? Sure, Angel, this is Todd. So we launch CapEx projects when we feel comfortable that we can execute them. Given the dynamic environment of the tariff situation, and clearly, supply chain pressures and disruption, we have large teams of people dealing with that on a more priority basis than launching some of the CapEx.
Brad: <unk>.
Brad: Potential kind of impact or benefits to our strategy and capital investments as we think kind of going forward or perhaps.
Brad: On size or timing of our location.
Brad: Thanks.
Tod Carpenter: Sure Angel. This is Tod so we launched capex projects when we feel comfortable that we can execute them given the dynamic environment of the tariff situation.
Speaker Change: Clearly our supply chain pressures and disruption we have large teams of people dealing with that on.
Speaker Change: A more priority basis than launching some of the Capex were also.
Tod Carpenter: We're also really holding more inventory than we had planned this year as a direct result of that. So we can offset a supply chain. Remember, our strategy is to always put our customers first. So while we had initially thought that we would be driving inventory down faster than we are, and launching CapEx projects, right now, it's really prudent to focus on executing the businesses for our customers. And that's what you're seeing.
Speaker Change: Really holding more inventory than we had originally planned. This year is a direct result of that so we can offset our supply chain remember our strategy is to always put our customers first so while we had initially thought that we would be driving inventory down faster than we are.
Speaker Change: And launching Capex projects right now, it's really prudent to focus on executing the businesses for our custom.
Speaker Change: And Thats, what Youre, saying.
Angel Castillo: Very helpful. Thank you.
Speaker Change: Very helpful. Thank you.
Brian Blair: Our next question comes from Brian Blair from Oppenheimer. Please go ahead. Your line is open. Thanks. Good morning, everyone. Good morning.
Speaker Change: Our next question comes from Bryan Blair from Oppenheimer. Please go ahead. Your line is open.
Bryan Blair: Thanks, Good morning, everyone.
Speaker Change: Good morning.
Brian Blair: So I was hoping you could offer a little more color on industrial solutions, top line trends.
Speaker Change: I was hoping you could offer a little more color on industrial solutions topline trends. Obviously the segment revenue guide was was maintained so moving parts net.
Brian Blair: Obviously, the segment revenue guide was was maintained. So you're moving parts net, I guess, I guess, to the same level.
Speaker Change: At the same level.
Brian Blair: You talked last quarter about the project driven side of IFS being, I guess, somewhat bifurcated, you know, auto, auto EV being notably weak. Unknown Speaker But having strength elsewhere, is that still the case? Is your team seeing any shift in that dynamic?
Speaker Change: You talked last quarter about the project driven side of <unk>.
Speaker Change: I guess somewhat bifurcated auto auto ETE being notably weak.
Speaker Change: But having strength elsewhere.
Speaker Change: Is that still the case as you're closing any shift in that dynamic and then connect that service revenue.
Brian Blair: And then on the connected service revenue? That's, of course, been a good guy for the segment, I think he would call out around 30%. year to date connected machine growth last quarter.
Speaker Change: That's of course, a good guide for the second I think you've called out around 30% year.
Speaker Change: Year to date connected machine growth last quarter.
Brian Blair: Are you still seeing a similar level of momentum? Sure.
Speaker Change: And are you still seeing a similar level of momentum there.
Tod Carpenter: So at the macro, Brad will get a couple of numbers here, Sarika. But at the macro, this is what's taking place. Within our industrial solutions businesses, the equipment side of the business is a bit more pressured. We still see a large number of quotes coming through. It's just a little bit slower to turn those into projects, but there is healthy activity out there, just a little bit more careful.
Speaker Change: Sure. So at the macro then I'll give it a couple of numbers here.
Speaker Change: But at the macro this is what's taking place within within our industrial solutions businesses. The equipment side of the business is a bit more pressured.
Speaker Change: Still see a large number of quotes coming through it's just a little bit slower to turn those into projects, but there is healthy activity out there just a little bit more careful therefore, what you're seeing from a company as more of an aftermarket story. It's also we've been growing share nicely in our.
Tod Carpenter: Therefore, what you're seeing from our company is more of an aftermarket story. It's also we've been growing share nicely in our what we call stationary hydraulics business and put those two together, hydraulics, aftermarket, and then now the newer portion of services together, they can really offset any of the other headwinds.
Speaker Change: What we call stationary hydraulics business.
Speaker Change: <unk>.
Speaker Change: Put those two together hydraulics.
Speaker Change: Aftermarket and then now the new newer portion of services together.
Speaker Change: They can really offset any of the other headwinds I would note also that in the quarter that power generation.
Tod Carpenter: I would note also that in the quarter that power generation, that's a very lumpy business for us. That was a bit more comparably year over year. And so as we look forward in the year, we have more projects that we'll be shipping.
Speaker Change: That's a very lumpy business for us.
Speaker Change: That was a bit more muted comparably year over year and so as we look forward in the year.
Speaker Change: We have more projects that.
Speaker Change: That will we will be shipping.
Brian Blair: And that really helps us to sustain the overall forecast within industrial Yeah, appreciate that.
Speaker Change: That really helps us to sustain the overall forecast within industrial solutions.
Speaker Change: Ryan This is Brad I just wanted to add one point Todd talked about the recurring revenue for mobile solutions in his prepared remarks, but I just wanted to say to the so the question about our results a little over half of the ISS business is replacement parts. So this is again something that gives us quite a good foundation.
Speaker Change: Especially as there is a little bit of a softening on the capex.
Speaker Change: Yeah.
Speaker Change: I appreciate that color.
Brian Blair: And I'm sorry, if I missed the detail, what, what was the, the margin impacts of reversing the PureLogix earn out reserves, and then given the, you know, prolonged path to bioprocessing commercialization, are the fiscal 26 targets for life sciences still in play? The total PureLogic specific was about $6 million in the quarter. And that's exactly what you said, it's an elongation of the revenue cycle in this business, similar to what we talked about with the other upstream businesses.
Speaker Change: I'm, sorry, if I missed the detail of what what was the the.
Speaker Change: The margin impacts of reversing the apparel objects.
Speaker Change: Earn out reserves and then given.
Speaker Change: The.
Speaker Change: Prolonged path to bioprocess and commercialization.
Speaker Change: The fiscal 'twenty six targets for life Science is still in play.
Speaker Change: The total pure logic specific was about $6 million in the quarter and that's exactly what you said, it's an elongation of the revenue cycle in this business similar to what we talked about what the other upstream business does as far as fiscal 2006 targets, we're going through the process of building our plans right now and Thats.
Brad Pogalz: As far as fiscal 26 targets, we're going through the process of building our plans right now. And that's something where we'll come back to the group with something in fourth quarter like we typically do. Yeah, I do want to point out, though, that, Brian, as we continue to work on life sciences, as this year evolves, our profitability within the life sciences business has sequentially improved each quarter of the year. Understood.
Speaker Change: Something where we will come back to the group with something in the fourth quarter like we typically do yes, I do want to point out, though that Brian as we continued to work on life Sciences as this year you all.
Speaker Change: Our profitability within the life Sciences business has sequentially improved each quarter of the year.
Brian Blair: Thank you again.
Speaker Change: Understood. Thank you guys.
Adam Farley: Our next question comes from Brian Drab from William Blair. Please go ahead. Your line is open. Hey, good morning. This is Tyler. I'm from Brian. Thanks for taking my questions. First, the aftermarket business continues to report growth. Just wondering how well this trend is expected to hold up in the next fiscal year. I'm not looking for guidance, but the full year guidance right now implies a somewhat deceleration in the fourth quarter. But maybe this is driven by a strong fourth quarter in the prior year. I'm just wondering how does the growth rate trend against the recent strong performance in the next few quarters?
Speaker Change: Our next question comes from Brian Drab from William Blair. Please go ahead. Your line is open.
Speaker Change: Hey, Good morning. This is Tyler on for Brian. Thanks for taking my questions first the aftermarket business continues to report growth I'm, just wondering how well this trend is expected to hold up in the next fiscal year.
Speaker Change: Now looking for guidance, but the.
Speaker Change: Our full year guidance right now implies a somewhat acceleration in the fourth quarter, but maybe this is driven by a strong fourth quarter in the prior year I'm just wondering how does the growth rate trend against the recent strong performance in the next few quarters, yes.
Tod Carpenter: Yeah, so if you just take a look at our company, and split it into two halves, the fiscal year, first half is about 48% of our revenue in the second half is 52. It is at our mobile solutions aftermarket certainly falls within that cyclicality. Typically, our third and fourth quarters are the strongest of the year. And so that's the reason why you see a strong performance in the third quarter, we just have good vehicle utilization. And very importantly, our teams are doing an excellent job at share gains within that giving us confidence that you'll continue to see that in the fourth quarter as well.
Speaker Change: Yes. So if you just take a look at our company and split it into two has the fiscal year first half is about 48% of our revenue in the second half is 52 it is.
Speaker Change: Our mobile solutions aftermarket certainly falls within that cyclicality.
Speaker Change: Typically our third and fourth quarters are the strongest of the year and so that's the reason why.
Speaker Change: You see a strong performance in the third quarter, we just have good vehicle utilization.
Speaker Change: And very importantly, our teams are doing an excellent job at share gains within that giving us confidence that youll continue to see that in the fourth quarter as well.
Tod Carpenter: Great. And then in aerospace and defense, can you be strong as well? What is your visibility like in this segment? Do the comps get tough in fiscal 2026? Or do you have enough project activity in the pipeline to maintain the current pace? Sorry, I'm not getting anything back. Can you hear me now? Yeah, can you hear me now? Okay, great. Yeah.
Speaker Change: Great and then.
Speaker Change: In aerospace and defense continues to be strong as well what is your visibility like in your segment do the comps get tough in fiscal 2026 or do you have enough project activity in the pipeline to maintain the current pace.
Speaker Change: Thanks.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Sorry, I'm not getting anything back.
Speaker Change: Can you hear me now.
Speaker Change: Yes.
Speaker Change: Okay great.
Tod Carpenter: So so when you look at the visibility of aerospace and defense, we do have long visibility as much as four and five and six quarters on some of the projects, they go multi year projects. And so we do have good visibility. The difficulty in that business right now is the uncertainty of supply chain. And and so we have fits and starts within the supply chain activities, making that a little bit more difficult to predict the lumpiness of it at this point in time, as well as they have had some swirling conversations of will there be some project cancellations, etc.
Speaker Change: So when you look at the visibility of aerospace and defense, we do have long visibility as much as four and five and six quarters on some of the projects. They go multiyear projects.
Speaker Change: And so we do have good visibility.
Speaker Change: The difficulty in that business right now is the uncertainty of the supply chain.
Speaker Change: And so we have fits and starts within the supply chain activities, making that a little bit more difficult.
Speaker Change: To predict the lumpiness of it at this point in time.
Speaker Change: As well as.
Speaker Change: We have had some swirling conversations of will there be some project cancellations et cetera.
Tod Carpenter: But but you know, project cancellations, conversations are one thing to be had in in the in the newspapers, it's another to understand whether they're really getting canceled or not. And we continue to execute all of those. So there's, there's some some macro environmental things that are making that a little bit more difficult to predict. But you know, you roll it all together. And the way the team is executing our business is really strong, doing an excellent job taking care of our customers.
Speaker Change: Project cancellations.
Speaker Change: <unk>.
Speaker Change: One thing to be had in the in the newspapers it's another.
Speaker Change: Understand whether they are really getting canceled or not and we continue to execute on all of those so there is there is some some macro.
Speaker Change: Yeah.
Speaker Change: Environmental things that are making that a little bit more difficult to predict but.
Speaker Change: You roll it all together and the way the team is executing our business is really strong doing an excellent job taking care of our customers.
Tod Carpenter: And as we said, we just shipped a record quarter in aerospace and defense.
Speaker Change: And as we said, we just shipped a record quarter in aerospace and defense business.
Adam Farley: Okay, thank you. I'll pass it along.
Speaker Change: Okay. Thank you I'll pass it along.
Lawrence Alexander: Our next question comes from Lawrence Alexander from Jeffries. Please go ahead. Your line is open.
Speaker Change: Our next question comes from Laurence Alexander from Jefferies. Please go ahead. Your line is open.
Dan Rizzo: Hi, this is Dan Rizzo, One for Lawrence. Just to follow up on that. So you indicated you had a record quarter in A&E. So was there some pull forward there? Because I mean, just based upon, and you kind of talked about this a little bit, based upon the overall 2-20-25 guidance, it seems like there is somewhat of a slowdown in the fourth quarter here, year over year. We did have some second quarter sales that flopped into the third quarter. And so rather than a pull head, it was a little bit of a push out, if you will.
Speaker Change: Hi, This is Dan Rizzo on for Laurence just just a follow up on that so you see you indicated you had a record quarter in A&D. So was there some pull forward there because I mean, just based upon and you kind of talked about this a little bit based upon the <unk>.
Speaker Change: The overall 2025 guidance it seems like there is.
Speaker Change: Somewhat of a slowdown in the fourth quarter here year over year.
Speaker Change: We did have some second quarter sales that flopped into the third quarter.
Speaker Change: And so rather than Paul had it was a little bit above of a pushout. If you will we know.
Tod Carpenter: We now, we're able to get those projects shipped and out. But that's the supply chain disruptions that I've been referencing here. And we've baked all of that into the guidance of the fourth quarter, and that's how it rolls up. So remember, we did have our aerospace and defense guide go from high single digits last quarter to now be low teens. So it has increased.
Speaker Change: We were able to get those projects shipped and out.
Speaker Change: The supply chain.
Speaker Change: Disruptions that I've been referencing here.
Speaker Change: And we baked all of that into the guidance for the fourth quarter and that's how it rolls up so so remember we did.
Speaker Change: We have our aerospace and defense guide go from high single digits last quarter to now be low teens. So it has increased.
Brad Pogalz: Yeah, one thing I'll add Dan, this is Brad, just keep in mind, please, that last year sales and aerospace and defense were up more than 20% in the fourth quarter. So if you just try to smooth that with a two year, the first half and the second half of this year are looking more comparable than what the math would suggest with the specific quarterly growth rate for fourth quarter this year. Okay, no, that's helpful. And then I guess the same thing kind of with aftermarket then because the fourth quarter, I mean, it's still a fairly strong year, but it looks like again, and this was alluded to before, there's a bit of a, I think, a downturn year over year in the middle based upon your guidance in the fourth quarter, but I guess that would just be attributed to it to a pretty tough comp.
Speaker Change: Yeah, one thing I'll add Dan. This is Brad just keep in mind. Please that last year sales in aerospace and defense were up more than 20% in the fourth quarter. So if you just try to smooth that with a two year. The first half in the second half of this year looking more comparable than what the math would suggest with specific quarterly growth rate for fourth quarter of this.
Speaker Change: Year.
Speaker Change: Okay. No. That's helpful. And then I guess the same thing kind of aftermarket then cause the fourth quarter I mean, it's still a fairly strong year, but it looks like again and this was alluded to before there was a bit of a I think a downturn year over year in the middle based upon your guidance in the fourth quarter, but I guess that would just be attributed to a pretty tough comp right.
Brad Pogalz: Right? Right. Right, exactly.
Speaker Change: Alright.
Speaker Change: Exactly.
Brad Pogalz: Okay, and then a final question.
Speaker Change: Okay, and then final question. So with FX is there a rule of thumb that we should use like many changes in the euro or the changes in the I don't know the peso or something like that of how how it works with you know with the fluctuations that we've seen over the past few months.
Brad Pogalz: So with FX, is there a rule of thumb that we should use like make changes in the euro or changes in the, I don't know, the peso or something like that of how, how it works with, you know, with the fluctuations we've seen over the past few months? All right, it does. Thanks a lot, guys.
Speaker Change: Yeah.
Speaker Change: It's hard because of the basket of currencies. So the euro is the most commonly traded outside of the USD and that's in the neighborhood of 20%. The next closest currencies are some Asian ones that are low single digits. So you can see that outsized movement in places like South Africa, or Brazil create a lot.
Speaker Change: The volatility within the total numbers. So it's hard to give you a euro stick on X percent equals y percent, but hopefully that helps some.
Speaker Change: It does thanks, a lot guys I'll turn it over.
Brad Pogalz: I'll turn it over.
Rob Mason: Our next question comes from Rob Mason from Baird. Please go ahead. Yes, thanks for taking the question. And congrats to Rich.
Speaker Change: Our next question comes from Rob Mason from Baird. Please go ahead. Your line is open.
Rob Mason: Yes, thanks for taking the question and congrats to rich.
Rob Mason: I want to circle back just on the industrial business, industrial segment, maybe I have honed in on IFS in particular the, you know, your guidance for the year kind of implies the fourth quarter would be up sequentially, as you talked about on the PowerGen side, that being more project driven. Similarly, the new equipment, I guess, in IFS, quoting activities down. So is the step up that we're seeing in the fourth quarter, is that? solely due to power gen that's the way and maybe aftermarket growth is that the way to think about Three things. One, aftermarket growth.
Rob Mason: I wanted to circle back just on the industrial business. The industrial segment, maybe hone in on Iff's in particular the.
Rob Mason: Your guidance for the year kind of implies the fourth quarter would be up sequentially Todd you talked about.
Rob Mason: On the power Gen side that being more project driven.
Speaker Change: Similarly, the new equipment I guess in Iff's quoting activity is down so if the step up that we're seeing in the fourth quarter or is that.
Speaker Change: Solely due to power Gen. That's the way and maybe aftermarket growth is that the way to think about that.
Speaker Change: Three things one aftermarket growth. So industrial production continues we continue to win share due to our connected.
Tod Carpenter: So industrial production continues. We continue to win share due to our connected based strategies. We also have a service based revenue that's been growing quite nicely. So that connected strategy really is helping to drive our aftermarket growth. So that's the first story. The second is we've done really well in industrial hydraulics or what we call stationary hydraulics. And we have grown that piece. And then the third piece will be the power generation that you referenced. Okay.
Speaker Change: Based strategies. We also have a service based revenue that's been growing quite nicely. So that connected strategy really is helping to drive our aftermarket growth. So that's the first story. The second is we've done really well in industrial hydraulics or what we call stationary hydraulics and we have grown that piece and then the third piece will be.
Speaker Change: The power generation that you referenced.
Tod Carpenter: And just because that is longer cycle PowerGen, is that, do you have visibility that stretches out over multiple quarters there? Or is that, I'm just curious if your commentary around lower quoting activity, you know, applies to that business also? We do. We have a very long visibility on power generation, some of the longest in the company. And I can tell you the power generation projects are really being sought after to lock up capacity from us all the way out as far as fiscal year 28. So that's the kind of conversations that we're having with our customers at this point.
Speaker Change: Okay.
Speaker Change: Just because that is longer cycle power. Gen is that do you have visibility that this stretches out over multiple quarters, there or is that.
Speaker Change: I'm just curious if the your commentary around.
Speaker Change: Lower quoting activity.
Speaker Change: Classes that business also we do we have a very long.
Speaker Change: Visibility on power generation some of the longest in the company and I can tell you. The power generation projects are really being sought after to lock up capacity from us all the way out as far as fiscal year 'twenty H. So thats the kind of conversations that we're having with our customers at this point now power generation is clear.
Tod Carpenter: Power generation is clearly in a growth cycle. It's already been for the last two years in a growth cycle. It's really an extended one as you read about in the newspapers, et cetera. And we're benefiting from that as well. Yeah.
Speaker Change: Early in.
Speaker Change: In a growth cycle.
Speaker Change: <unk> already been for the last two using a growth cycle. It's really an extended one is as you read about in the newspapers et cetera, and we're benefiting from that as well.
Speaker Change: Okay.
Brad Pogalz: I may have missed this, Brad, when you were commenting around the 5th print optimization, but when would you expect those moves to be complete in terms of just having a negative impact on gross margin?
Speaker Change: And then maybe I.
Speaker Change: You may have missed this Brad when you were commenting around the footprint optimization, but.
Speaker Change: When would you expect those moves to be complete in terms of just having I guess a negative impact on gross margin and.
Brad Pogalz: And then if I could let her on another one real quick, just how should we be thinking about the timing of these? tariff flow throughs as well as your mitigation efforts? I know it was negligible in the third quarter, but just over the next few quarters, cadence? Sure. Both important questions. Footprint, a lot of the heavy lifting is going to be done towards the end of this calendar year. There will be some trickle through into next year as we complete the moves. So that's something that we'd expect to happen again in the coming quarters. Tariffs, the flow through, you can give or take 1% of sales, I think $35 million or so.
Speaker Change: And then if I could layer on another one real quick just how should we be thinking about the timing of these.
Speaker Change: Tariff flow throughs as well as your mitigation efforts I know it was negligible in the third quarter, but just over the next few quarters cadence served.
Speaker Change: Both important questions footprint a lot of the heavy lifting is going to be done towards the end of this calendar year, there will be some trickle through into next year as we complete the moves. So that's that's something that we would expect to happen again in the coming quarters.
Speaker Change: Tariffs the flow through you can think about this give or take 1% of sales I think $35 million or so.
Speaker Change: It's almost ratable at this point based on flow of goods now of course, that's the estimate today and things are things are constantly changing but from from our seeds and Todd touched on this the region to support region footprint gives us a great advantage here and then further the U S. MCA qualifications really help us.
Speaker Change: So we do believe this is something that we can handle the offset as a function of pricing or moving moving supply chain.
Speaker Change: Right.
Brad Pogalz: Very good.
Brad Pogalz: Thank you.
Speaker Change: Very good thank you.
Speaker Change: Yes.
Tim Thein: Our next question comes from Tim Thein from Raymond James. Please go ahead. Your line is open. Thank you. Good morning.
Speaker Change: Our next question comes from Tim Thein from Raymond James. Please go ahead. Your line is open.
Speaker Change: Thank you good morning, maybe I'll do it.
Tim Thein: Maybe I'll just package these together.
Speaker Change: Packages together the first question is on <unk>.
Tim Thein: The first question is on Maybe just some preliminary thoughts as we're looking at 26. I know, Todd, you're putting together the plans, but maybe just anything you could offer in terms of, I don't know, maybe markets or geographies that you're maybe more optimistic about. Maybe just, again, a high-level thought to the extent you can share that.
Speaker Change: Maybe just some preliminary thoughts.
Todd Carpenter: As we're looking at 26 I know Todd you are youre, putting together the plans, but maybe just anything you could offer in terms of I don't know maybe markets or geographies that you are.
Speaker Change: It might be more optimistic about them.
Speaker Change: Maybe just again high level thoughts to the extent you're.
Tim Thein: Then part two is just on the mobile aftermarket. If you look across both the OE and independent channels, any comments just in terms of general inventory levels, and where the channel sits from a stocking perspective, and that's it for me. Thank you.
Speaker Change: Sure that.
Speaker Change: Part two is just on the.
Speaker Change: The mobile aftermarket.
Speaker Change: Look across the.
Speaker Change: Both at the OE.
Speaker Change: Independent channels, where any comments just in terms of general inventory levels.
Speaker Change: And where where the channel sits from a kind of from a stocking perspective.
Speaker Change: Sure Let me Thats it for me thank you.
Tod Carpenter: Yeah, let me take the inventory question first. So I'll tell you, in the mobile aftermarket, we grew in both the OE and independent channels within this quarter, low single digits, low to mid single digits in both of those. And as a reminder, our independent channel is 55% of our mobile aftermarket and the OE is 45. Relative to inventories out there, they feel like they're at pull through levels. It's very comfortable conversations with both channels. And so that that all feels like we will experience the normal cyclicality that we would expect in the fourth quarter.
Speaker Change: Yes, let me take the inventory question first so I will tell you in the mobile aftermarket we grew in both the OE and independent channels within this quarter.
Speaker Change: Low single digits low to mid single digits in both of those and as a reminder, our independent channel is 55% of our mobile aftermarket and the OE is 45 relative to inventories out there they feel like a pull through levels.
Speaker Change: It's very comfortable conversations with both channels and so that all feels.
Speaker Change: We will experience a normal cyclicality that we would expect in the fourth quarter.
Tod Carpenter: As far as fiscal 26. You know, obviously, we're going to be smarter in 90 more days, given the dynamic environment. But maybe what I'll I'll say is I find it pretty interesting. I hope you find it very interesting that our company just had a record quarter yet again. While our OE and markets have headwinds and declining somewhat in the on road and the agriculture sectors. And yet we still continue to perform very well. We are poised when the overall economic cycle ticks up to really leverage that. And our company is in a solid, solid position and executing exceptionally well as we look to 26 in our plans.
Speaker Change: As far as fiscal 'twenty six.
Speaker Change: Obviously, we're gonna be smarter and in 90 more days given the dynamic environment.
Speaker Change: But maybe what I'll say is I find it pretty interesting I hope you find it very interesting that our company just had a record quarter yet again.
Speaker Change: While our OE.
Speaker Change: And markets have headwinds and declining somewhat in the on road and the agricultural sectors and yet we still continue to perform very well we are poised when the overall economic cycle takes up to really leverage that in our company is in a solid salt.
Speaker Change: Would position and executing exceptionally well as we look to 2006 and our plans we will continue to have that in our sites.
Tod Carpenter: We'll continue to have that in our sights. And that's the type of plan that we'll we'll put together for you. And we'll talk about here in about 90 days.
Speaker Change: And that's the type of plan that will we will put together for you and we'll talk about here in about 90 days.
Tim Thein: Alrighty, thank you.
Speaker Change: Alright, thank you.
Nathan Jones: Our last question comes from Nathan Jones from steeple. Please go ahead. Your line is Thank you.
Speaker Change: Our last question comes from Nathan Jones from Stifel. Please go ahead. Your line is open.
Adam Farley: Good morning.
Speaker Change: Yes. Thank you and good morning. This is Adam Farley on for Nathan.
Adam Farley: This is Adam Farley on for Nathan.
Tod Carpenter: I wanted to follow up on the tariff discussion. I realize that it's relatively immaterial on the cost side, but do you have any expectations from lower global growth due to disruption or uncertainty from tariffs? Any view on potential demand disruption from tariffs? Tough to say, you know, we we continue to react to it, talk to all of our customers, make sure we take care of our customers. It's just, it's just tough to say. I think, I think if you take surveys out there, you get a varying degree of opinions for us right now. You know, clearly the first bit projects, both in industrial and mobile, are clearly more careful.
Speaker Change: I wanted to follow up on the tariff discussion.
Speaker Change: Realize that it's relatively immaterial on the cost side, but do you have any expectation from lower global growth due to disruption or uncertainty from tariffs.
Speaker Change: Maybe just any view on potential demand disruption from tariffs.
Speaker Change: Tough to say.
Speaker Change: We continue to react to it and talk to all of our customers make sure we take care of our customers.
Speaker Change: It's just it's just tough to say I think I think if you take surveys out there you'll get a varying degree of opinions for us right now.
Speaker Change: Nearly the first fit projects both in industrial and mobile are are clearly more careful but if you say vehicle utilization of our aftermarket pace businesses. Our service based businesses those kind of activities. They continue to March along pretty well.
Tod Carpenter: But if you say vehicle utilization, our aftermarket based businesses, our service based businesses, those kind of activities, they continue to march along pretty well. So it's really tough to say, as far as will there be a pullback?
Speaker Change: So it's really tough to say.
Speaker Change: As far as will there be a pullback.
Tod Carpenter: What lies ahead? We're managing carefully, just like everyone else. And, you know, doing a very good job at that.
Speaker Change: What lies ahead.
Speaker Change: Managing carefully just like everyone else.
Speaker Change: And doing a doing a very good job at that.
Tod Carpenter: All right, I'll leave it there. Thank you for taking my question.
Speaker Change: Alright ill leave it there. Thank you for taking my question.
Operator: We have no further questions.
Tod Carpenter: We have no further questions I'd like to kind of fall back over to Tod Carpenter for closing remarks.
Tod Carpenter: I'd like to turn the call back over to Tod Carpenter for closing remarks. That concludes the call today. Thanks to everyone who participated. We look forward to reporting our fourth quarter and full year fiscal 2025 results in August. Have a great day. Goodbye. This concludes today's call.
Speaker Change: That concludes the call today, thanks to everyone, who participated and we look forward to reporting our fourth quarter and full year fiscal 2025 results in August.
Speaker Change: Have a great day goodbye.
Speaker Change: This concludes today's call you may now disconnect.
Operator: You may now disconnect. and Renowned Private.
Speaker Change: And we're now on private have a great day everyone.
Operator: Have a great day, everyone.