Donaldson at William Blair Conference: Strategic Growth and Resilience

On Thursday, 05 June 2025, Donaldson Company Inc. (NYSE:DCI) presented at the 45th Annual William Blair Growth Stock Conference. The company highlighted its strategic focus on technology-led filtration solutions, reporting record revenues despite challenges in some markets. CEO Todd Carpenter and CFO Brad Pogals outlined both the opportunities and headwinds faced by the firm, emphasizing resilience and long-term growth potential.

Key Takeaways

• Donaldson achieved record revenues and earnings, with a focus on technology-led filtration and Life Sciences.
• The company plans to expand its operating margin to 16.2% next year.
• Capital allocation prioritizes organic investment, acquisitions, dividends, and share buybacks.
• Donaldson’s global presence helps mitigate tariff impacts and supports market resilience.
• The Life Sciences segment faces challenges but remains a strategic focus for growth.

Financial Results

• Record revenues and earnings are expected for the current fiscal year.
• Adjusted operating margin stands at 15.8% for the current fiscal year, with a target of 16.2% for fiscal year 2026.
• Over the last three years, $1.4 billion was allocated for organic investment, acquisitions, dividends, and share repurchases.
• The company raised its dividend by 11%, marking the 30th consecutive year of increases.
• The debt ratio is approximately 0.8, with free cash flow at roughly 85% of net income.

Operational Updates

• Donaldson operates about 150 locations globally, with 65 manufacturing plants, and 75% of revenue is generated within the region it is consumed.
• Tariff headwinds estimated at $35 million are offset through supply chain pricing and surcharges.
• The Mobile Solutions segment won the fuel cell program at Daimler.
• The Industrial segment is digitizing dust collection systems for predictive maintenance, with aftermarket business growth from 30% to 50% of the segment’s revenue.
• The Life Sciences segment entered the market with acquisitions and internal inventions, acquiring 49% of Medica for hollow fiber membrane technology.

Future Outlook

• Donaldson targets operating margin expansion to 16.2% next year, with long-term potential reaching 17-18%.
• The company expects significant operating margin leverage when original equipment markets recover.
• Balanced growth is planned through organic investments and mergers and acquisitions, with a continued focus on the Life Sciences segment despite current headwinds.
• Donaldson leverages its long history of filtration technology leadership, deep customer relationships, and best-in-class operations.

Q&A Highlights

• CFO Brad Pogals emphasized that complex global problems increase the need for filtration solutions.
• The company has renegotiated pricing relationships with original equipment manufacturers for fairer pricing, sometimes allowing for annual price increases.
• Donaldson’s diverse business portfolio provides natural hedges against cyclical downturns in specific markets.

For a detailed overview of Donaldson’s strategic insights and financial performance, refer to the full conference call transcript below.

Full transcript - 45th Annual William Blair Growth Stock Conference:

Brian Draub, Industrial Technology Analyst, William Blair: Okay. We’ll go ahead and get started. Thank you all for coming to the Donaldson presentation. I’m Brian Draub, the Industrial Technology Analyst at William Blair. I’ve covered Donaldson for seventeen years now.

So today we’re happy to have with us CEO, Todd Carpenter CFO, Brad Pogals. It’s not Pogals. Pogals. Pogals. Pogals.

Okay.

Todd Carpenter, CEO, Donaldson: Got it.

Brian Draub, Industrial Technology Analyst, William Blair: See every detail and I blew one of them. And Sarka Dodwal, who is the Senior Director Investor Relations in ESG. So thank you all for coming to the presentation. Donaldson, as many of you in the audience will know is a world leader in filtration, specifically in engine markets, heavy duty engine, on road and off road also many different industrial applications. And most recently the company over the last few years has been expanding their presence in the medical bioprocessing markets and we’ll get an update there.

Of course, that’s a very challenging end market right now. Everyone who has exposure to life sciences has been having some challenges. So maybe we’ll have some questions on that. I know it came up on the earnings call. But at this point, I’ll turn it over to Todd.

Thank you very much for being with us today.

Todd Carpenter, CEO, Donaldson: Thanks, Ryan, and thanks to all of you for being here. We want to start of course with our forward looking Safe Harbor to satisfy all the lawyers across the world I suppose. But we are in an enviable position right now having reported earnings on Tuesday typically. We have to always reach back a number of months. But all the information then we’ll talk about today is very fresh.

So that will be a very nice timing. Five key points that I want you to take away from this presentation and about our company. So our strategy is to be a technology led filtration company. We are a leader in filtration around the world for all the markets that we serve. Second, we have best in class technology where we solve very complex customer problems, which gives us deeper relations to the customers and that kind of relationship is very important in our company model.

The third, those customers are global in nature and we are everywhere that the customer wants us to be, particularly important in this time of tariffs and we’ll talk a little bit more in the presentation about that, that we have a clear strategic growth strategy. It’s very balanced organically as well as the M and A. We’ll talk about that. And then fifth, we are progressing toward a life sciences type of business where our products that we are inventing organically to go into there as well as the M and A, the acquisitions that we have done are differentiated products. They are also disruptive products that we bring into those spaces.

So specifically Donaldson is a 110 year old technology led filtration company. You see our revenue breakout in the lower left. We have three reporting segments. Mobile Solutions is 62%, Industrial is 30%, the balance is Life Sciences. Very importantly, we sell proprietary razors to sell razor blades.

We do it through our filtration businesses. We do it in every business that we have. And therefore, roughly 68 of our revenue is razor blades, the balance being first fit or in our industrial based businesses, we would say that would be first fit equipment using our proprietary filtration technologies. Our overall results, you see each of the last four years there we continued to grow. Everything you see with regards to revenue and adjusted earnings per share are all records for each of the prior four years.

When I say we are a Techland in 2019 and our Investor Day of April of twenty twenty three, that means somewhere in the world on average, Donaldson was granted a patent every day. We’re serious about our strategy. We continue to invent cool things. I often say I should be wearing a black turtleneck, but that gig has been taken. We really have some cool technologies within our company.

Very important in this time of tariffs, our particular model has 44% of our revenue in U. S. And Canada, Twenty Eight Percent Europe, Ten Percent or so, 10% or 11% in Latin America and 17% in Asia. Important is that 75% of all of our revenue is built within the region that it is consumed. That gives us really good advantage within a natural hedge of the tariff activities going on and obviously the constant movement of that.

We are able to shift quite nicely. The U. S. Is a net exporter for Donaldson Company. We have roughly 150 locations around the world.

We have about 65 manufacturing plants. They’re in every region of the world. And so that allows us from a supply chain standpoint of view as the economics make sense to shift from one region to the other to build it, if we are not completely in that region. And so we have a nice way of moving that 25% around. It’s the reason why on Tuesday, we said that with the current tariff situation what’s implemented, the headwinds that we have in the company are about 35,000,000 roughly.

And we have ways to offset all of that either through supply chain pricing, we use surcharges etcetera. So relative to tariffs our story is pretty straightforward. We feel pretty comfortable that we can offset it all. The one thing we do want to mention with that is we’re looking to offset the dollars. That doesn’t mean we get profit on tariffs.

So there will be slight gross margin pressure as a result of that obviously because you’re not able to roll that all the way through. We are with tariffs looking to have very fair relationships with our customer base. It’s working out quite well so far. But as a company, we’re able to flex quite well so far with everything that’s taken place. Along the bottom, you see our end markets, how we really are comprised within our business units and the split within each of those business units of first fit or say proprietary first fit and then the lighter blue is the replacement parts.

Here you see our financials and giving including the guidance that we have out for this fiscal year. This fiscal year expects to turn with one quarter remaining. So we are through three quarters of our fiscal year just reported on Tuesday of this week, which means one quarter left. We fully expect to have record revenues and record earnings this fiscal year yet again. You see all of that.

Our adjusted operating margin is for this year is 15.8. We have given guidance for fiscal twenty twenty six, which would be next year early guidance that our midpoint is to get to 16.2%. We continue to expand our operating margin as you see here over a number of years. We will come out with guidance at when we give the full year report here in about ninety days. Again, we are the filtration leader with many durable competitive advantages.

We have a long history of filtration technology leadership as I talked about. We do have the deep customer relationships. You see the balance. But I do want to emphasize that we have best in class operations. We are everywhere that the customer wants us to be.

That’s we get close to them when we have the volumes necessary. We expand our manufacturing footprint or do what’s necessary to get that customer taken care of. And we’re very, very proud of how we go to market that way. And that allows us one of the many reasons technology as well as deep customer relationships to have a high aftermarket retention that you saw at 68% on that first slide. We have three reporting segments: Mobile Solutions, Industrial Solutions and Life Sciences.

The Mobile Solutions is medium and heavy duty diesel engines, construction, mining, agriculture, long haul trucks that we have been the traditional that’s how our company started. We’ve been the traditional leader in that particular space. We remain the leader. We are working on alternative fuel solutions with customers. Recently we announced that we have won the fuel cell program at Daimler for example where we’ll help them do all the filtration.

Now it’s interesting to understand on the alternative fuels, if you’re moving away from diesel fuel and you let’s say you’re going to go to hydrogen there’s two ways. You can do it in a fuel cell. You can do it as the combustion engine portion. Either way you still need air filtration. And the fuel itself actually has to take particulate and water out of it, which is exactly what you do for diesel fuel and we are best in class to be able to do that.

However, there’s also a third need, particularly in fuel cells and that is you have to take out some of the other concentrates such as sulfur dioxide or mercury because you need more of a pristine type of a fuel, especially on fuel cells. We are excellent at that. We’ve been doing chemical absorption within other business units within Donaldson for decades. So we can tailor make that for the particular customer and that’s the reason why we’ve been winning in the alternative fuels relative to hydrogen. It’s very important to really understand that not all fuel cells are exactly the same.

One customer’s fuel cell may have to have sulfur dioxide, but the others may take may be more susceptible to a different type of a contaminant. And so we’ll be able to absorb that out for them. So it’s very broad range type of spectrum. Good growth opportunities within the Mobile Solutions opportunity segment. We’re growing very well in our aftermarket business.

As we reported this week, we are low single digit growth even in an environment where a lot of our first fit vehicle end markets are have headwinds. They’re a bit troubled at this point. We continue to grow in the Mobile Solutions space. In Industrial, we have a number of different applications within that space. What we are doing, if you have a process where it’s an industrial dust, a mist or a particulate of some sort, we will filter that out for you to either make your environment better, have the machine protected, anything that you need.

And additionally, we have a power generation business inside there. So think of base and peak load power stations, oil and gas type of power stations all around the world. We filter out the ambient air, make that proper, so the gas turbine can actually do its job and create power in the national grids around the world, all the way to industrial hydraulics and a number of other diverse businesses in that particular segment of industrial. It is growing nicely. It also has a good operating margin of 18%.

Our strategy within that segment to grow it is to digitize it. So much like you have seen in a car with OnStar, we now have when we send your dust collector out, we now have it when you turn it plug it in, it will actually tell how it’s operating back to Donaldson Company and we can call the maintenance person and say, hey, go do this to your dust collector, so you don’t shut down your production. It’s really giving us again deeper relationships with the customer. You’re seeing our aftermarket business grow there. I would tell you as much as seven or eight years ago, our aftermarket in that business used to be about 30%.

Our first fit was 70 We’ve gotten good momentum with this strategy. Now it’s about fifty-fifty. So you can see our aftermarket business is really going quite well within there and we expect good things going forward to help us drive growth within that segment. Within Life Sciences, Life Sciences we entered that segment as a new segment. It’s small for our company $250,000,000 or so.

We like the space because of the difficult challenges of filtration that the space actually allows us to help solve for our customers. We are not going in on a me too type of a basis. We did do acquisitions. We did pre revenue based acquisitions. We also have some really cool inventions at our laboratories.

Each of those will be rolling out over time in order to grow it. The as we entered that space that particular market did start to create some new headwinds particularly on the bioprocessing side. You see that within those end markets. It’s going to take us a little bit more time than we had hoped for sure to be able to grow into that particular space. But make no mistake, we really like the space.

We like what we’re bringing forward. We really have some differentiated products and we’ll be talking more about that here in the months and quarters to come. Here are the acquisitions that we have done. Our addressable market in Life Sciences large 21,000,000,000 Traditional Mobile Solutions segment, we are roughly about $2,200,000,000 to $2,300,000,000 currently in revenue of the $14,000,000,000 in that segment. Again, that segment likely could grow if hydrogen goes to be the winner in that space.

And that looks to be more the direction that that particular market is heading. Within Industrial Solutions, it’s 15,000,000,000 We’re about 1,200,000,000.0 to $1,300,000,000 within that space. You see the five acquisitions that we have done across the life sciences space. Our most recent one Medica out of Italy where we now own 49% brings a brand new technology to our company. It’s called hollow fiber membranes.

If you think about your hair, your hair is about 10 to 15 microns in diameter. What this does is give you almost like an extruded straw if you will kind of oversimplifying this. And it’s important to understand the wall structure, the pores of that wall structure. Your hair again is 10 microns will be 0.2 microns in order to be able to get into the bioprocessing spaces and help with the drug applications. That’s why we bought it.

It’s another really cool technology add to Donaldson Company and we’re really excited about the future that that can help us bring for our company. As far as balanced capital allocation, our first priority is to invest back into the company organically and through acquisition. Third is dividend. We raised our dividend this week or sorry last Friday by 11%. It is the thirtieth year in a row we have raised our dividend.

We are a proud member of the Dividend Aristocrats Fund. That means you have to have raised your dividend twenty years or more in a row. As I said, we are at thirty years. Dividend is very important to us and for our shareholders. We continue to prioritize that.

And then the fourth one is share buyback. You can see our how we’ve used capital over the last three years for share buyback. Important to note that in this quarter, we did we ended the quarter at 0.9% roughly 1% of shares bought back. Our guidance was midpoint 2.5% on the buyback. As we stand here today based upon what was going on in the last quarter, we saw opportunity.

We took it. We are now at 3.3 bought back. So we were above the guide. It just made sense for us to do that. Yes, that means I feel like the company was undervalued and so we did it.

And looking forward, we gave a guide of between 3.5% to four percent as far as share buyback. But again, we’ll invest back in the company organically. We’ll buy companies through M and A, dividends and then share repurchases. Those are our capital allocations. And over the last three years, we gave we allocated $1,400,000,000 in that fashion.

When you look at our balance sheet and you look at the model what it brings, roughly our debt ratio we like to operate at about one. Today, we sit at about in the neighborhood of about 0.8. So we’re in a strong position there. Free cash flow of roughly about 85%. That’s right about our guide today.

And we have available to us $800,000,000 worth of capital, which means that we can be an acquirer of choice. So on that acquisition piece, we still do look for targets that we continue to work across our strategic pipeline and feel very good about. So again, going back to the five points, we are a leader in filtration. We are best in class in technology. We’ve got a lot of really, really cool things.

We do help our customers solve very, very complex problems for themselves. And we have a good strategic and clear balanced growth plan. And we are progressing into the Life Sciences segment, a little slower than we would want due to the end market moves, but we still love the space and what it could bring for our company. So with that, I will open it up for questions.

Brian Draub, Industrial Technology Analyst, William Blair: Yes. Thanks very much, Tom. And it’s great to have you here Brad and Sarica of course. But Brad, I’m looking at some of my notes from Donaldson from ten years ago and conversations that we had. I don’t know if you Brad just want I know that the investment community at large is familiar with you and you joined you took the CFO role on recently.

But some of my clients might not know your background. Do you mind just saying a couple of things and the opportunity from your perspective as well?

Brad Pogals, CFO, Donaldson: Yes. I joined Donaldson ten years ago. I started as Head of IR in the role Sarka has today. I was in that job for about five years. I moved during COVID to Belgium to head up and be the CFO of our EMEA Finance Region.

And so I was there for the last five years. During that time, I also took on Global Head of FPA for the company. And then in the last, I was named CFO and took over November 1 and now here since. So opportunity, I do want to take a moment on that. The thing that impressed me about Donaldson when I joined and continues to be part of our conversation is what Todd said about technology led filtration.

So I think when I came on, it was a retail background, and I really didn’t realize where all the filters were in the world, and I thought about my furnace and my car. We don’t sell on any of those things. It’s low tech. We make different choices at the company. And I think what gives me a lot of optimism and part of where I’m happy to be in this chair and grow more with Donaldson is as the world gets more complicated, regardless of what happens with AI or robots in manufacturing, these things still get manufactured or equipment is still moving around.

So with complicated problems in the world, there’s more need for filtration, not less. And I really do think that creates an exciting opportunity for us as a company.

Todd Carpenter, CEO, Donaldson: Even robots need filters. It’s a beautiful thing.

Brian Draub, Industrial Technology Analyst, William Blair: You want to elaborate on that Todd? Even robots need filters you said?

Todd Carpenter, CEO, Donaldson: They have to have vent filters because they actually breathe relative to how it operates. So there’s a lot of venting applications across a lot of the machinery that you see particularly EVs for example headlamps a lot of different applications and we do that extremely well.

Brian Draub, Industrial Technology Analyst, William Blair: In a conversation that you and I had this year, you were talking about margin expansion potential and longer term margin potential. And you said some I don’t want to put I’m not going to say number, but can you talk about what you see as the long term margin potential? Where can operating margin go for Donaldson over long term and why?

Todd Carpenter, CEO, Donaldson: Yes. So we’re currently coming out this year at 15.8%. I think five or six years ago we’d have been down at 12% high-12s maybe something like that. Our Investor Day, we set a target at 16%. Clearly, next year we’ll be above 16%.

We have programs in place to continue to expand our operating margin. 2017 is clearly in sight. We have a path to be able to get to 2017. And then you say, okay, well how about 2018? It’s a sure.

And so we do believe we’ll continue to expand our operating margin. It will take time. We’re not going to just go cut the middle out so hard that we get the operating margin and hurt the company. That’s not the way we do business. We do take customer relationships very, very seriously.

But there’s obvious efficiencies that we can gain. For example, we’re currently shutting down two manufacturing plants one in England, One in California. There are other opportunities to really help optimize our footprint. There are other efficiency plays that we have. Important to understand that our company is now 97% of our revenue goes through one business system.

So we’ve gone through all of that metamorphosis. The only thing that really isn’t done right now is Brazil. It will go live later this calendar year maybe January or so. That means we’ll be 100% on a business system. That allows you to take this distributed model of certain business processes and centralize them wherever in the world you want to centralize them in order to become more efficient and control processes and drive cost reduction, as well as now pricing based models that we have coming out of the supply chain situation.

We have really done a good job at resetting all the pricing activities in the company. And now we have a much fairer relationship with our customer base. And that’s how we talk to them and really embrace that challenge collectively. We are not trying to maximize our overall pricing with the customers. We’re just trying to optimize it.

Because remember every razor blade we sell, we get the razor every razor we sell, we get the razor blade. And so that’s an important type of significance to that. So we’re trying to optimize the overall gross margins and the pricing with fair relationships with customers. But we use all of these macro based opportunities and you roll it all up and we clearly have room to expand our operating margin and we will.

Brian Draub, Industrial Technology Analyst, William Blair: And on that pricing note, one thing that has happened at the company and correct me if I’m wrong, for the 02/2020 period as I was following the company, it seemed that every year for most of your business lines especially on the engine side, it’s kind of prices down one point. How do we become more efficient in the operation to get that back. But that’s different today, right? And this is one of the things that from my perspective gives you that potential to

Todd Carpenter, CEO, Donaldson: Yes. When we’re 110 year old company. And so we got our beginning in many of the large OEs in construction and agriculture and mining and those relationships had gone a little bit more to the favor on the OE whereby we would start every year with a price down. We would start negative one or negative two in business segments and have to make that up with cost reduction on an annual basis. In the supply chain disruptions that was just not tenable for anybody for them for us.

And so consequently we were able to get rid of all those clauses, make all those contracts reset and really now have a much more fair relationship. And in fact, we get price increases on a number of those particular relationships on an annual basis now as appropriate based upon inflation and all the rest. So it was massive undertaking for the company. The company now has I think a lot more confidence in our relationships with our customers that they’re more fair and proper and really set for a long term opportunity.

Brian Draub, Industrial Technology Analyst, William Blair: Yes. Just think that’s a huge structural change in the business that really is important going forward. If there are any questions from the audience, please raise your hand. Otherwise, I’ll ask a couple more. We have four minutes here.

One of the other things that you talked about earlier this year in a conversation with me was the potential for some of these end markets that are under pressure right now to bounce back like we’ve seen in the past when the engine market comes back it’s not up 5%, right? What do you see for these businesses over the next few years?

Todd Carpenter, CEO, Donaldson: Well, it’s actually simple straightforward. I’ll just go back to this one slide here, okay? That’s what we’ve done in the last four years in spite of the fact that our major end markets have headwinds. Construction, agriculture is legendary. You hear it from John Deere all of those people are our customers.

It continues to walk down. Over the road trucking just walked down again in the last ninety days. They thought it was going to be between say 550,000 trucks. Now they’re more down to between 450,000 trucks from a year or two years ago roughly 330,000 trucks. That’s a significant market for us.

That’s down. Every one of those OE markets, those first fit vehicles and equipment builds right now are down. And yet our company is performing like this. So my point to Brian is, when those markets bounce, they don’t bounce low single digits. They bounce double digits and sometimes over 20.

So that’s what gives me confidence that we’ll leverage even more to the operating margin when we get the volumes back on the first fit side of our company. Our gross margin will come down a little bit because of mix, but the overall operating margin will go up because of because we’ll leverage that through the organization. It gives me confidence that we can expand our operating margin and that our company is in excellent, excellent shape to take advantage of that next economic upturn around the world.

Brian Draub, Industrial Technology Analyst, William Blair: And one of the reasons that those results have been so resilient is that you have such a strong aftermarket revenue stream, right? We’ve talked about this over the years. There’s sometimes an impression that on road truck is going to be is weak. So that’s it’s 3% of your revenue though, right? You have 60% plus of your sales in the aftermarket, which also are somewhat higher margin products as well too.

Todd Carpenter, CEO, Donaldson: So the other important piece about our company and a lot of people will tag a particular end market and say, that one’s down, so your company is going to have a little bit of trouble. The diversity of our of the businesses, the portfolio of businesses that we have in our company give natural hedges on some of that activity. You take a look our company is growing and yet we have multiple end markets facing headwinds, right? Why? Because we have other ones that don’t have those headwinds and are doing really well power generation being one that’s helping offset some of those kind of activities.

So the diversity of portfolio really helps us go forward and gives us confidence that look our company is going to be less cyclical. We work very, very hard to make our company less and less cyclical coming off of one hundred and ten years and that’s work that will never end for us. But we’re doing okay from that perspective I would say. I’m a little biased.

Brian Draub, Industrial Technology Analyst, William Blair: Great. Well, we’re just about out of time. So I think we’ll wrap up. Thanks very much Todd, Brad, Sarka. Thank Thank being here.

Brad Pogals, CFO, Donaldson: Thank you.

Brian Draub, Industrial Technology Analyst, William Blair: Thank you everyone.

Todd Carpenter, CEO, Donaldson: Thanks everyone.

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