Earnings call transcript: Donaldson Company beats Q4 2025 earnings expectations

Donaldson Company Inc. (DCI) reported its Q4 2025 earnings, surpassing expectations with an adjusted earnings per share (EPS) of $1.03, compared to the forecast of $1.02. Revenue reached $981 million, exceeding the expected $951.57 million. Despite the positive earnings surprise, pre-market trading saw the stock dip by 0.78%, reflecting investor caution. The company’s full-year results highlighted record sales and operating margins, setting a positive tone for the upcoming fiscal year. According to InvestingPro data, Donaldson maintains a "GOOD" overall financial health score, with particularly strong marks in profitability metrics.

Key Takeaways

• Donaldson’s Q4 EPS of $1.03 surpassed the forecast by 1 cent.
• Revenue for Q4 2025 was $981 million, a 5% increase year-over-year.
• The stock experienced a 0.78% decline in pre-market trading.
• Record full-year sales of $3.7 billion and operating margin of 15.7%.
• Strong growth in Life Sciences with a 20% increase in food and beverage sales.

Company Performance

Donaldson Company reported a strong finish to its fiscal year 2025, with record sales and operating margins. The company’s diverse business model, spanning mobile, industrial, and life sciences segments, contributed to its robust performance. The Life Sciences division, in particular, showed significant growth, driven by a 20% increase in food and beverage sales. The company’s strategic partnerships and innovations, such as the launch of the Purexa product, further solidified its market position.

Financial Highlights

• Revenue: $981 million in Q4, up 5% year-over-year
• Earnings per share: $1.03, a 10% increase from the previous year
• Full-year sales: $3.7 billion, an all-time high
• Operating profit margin: 15.7%, a record for the company

Earnings vs. Forecast

Donaldson’s Q4 2025 EPS of $1.03 exceeded the forecast of $1.02, representing a modest surprise of 0.98%. Revenue also beat expectations, coming in at $981 million against the forecasted $951.57 million. This performance aligns with the company’s trend of consistent earnings growth, reflecting effective management and strategic initiatives.

Market Reaction

Despite the earnings beat, Donaldson’s stock fell 0.78% in pre-market trading, with the price reaching $75.04. This decline may indicate investor caution or profit-taking after a strong year. With a market capitalization of $9.45 billion, the stock trades near its 52-week high, demonstrating a pattern of low price volatility according to InvestingPro analysis. The company’s P/E ratio of 26.78 and strong current ratio of 1.94 suggest solid financial positioning.

Outlook & Guidance

Looking ahead to FY 2026, Donaldson projects total sales to reach $3.8 billion, with an operating margin target of 16.4%. The company expects EPS to grow to $4.00. Key growth areas include a 15% increase in Life Sciences and steady growth in Industrial Solutions. The company remains focused on margin expansion and structural cost improvements.

Executive Commentary

CEO Todd Carpenter emphasized Donaldson’s leadership in technology-led filtration, stating, "Donaldson is the leader in technology-led filtration." CFO Brad Poggles highlighted the company’s growth outlook, noting, "We are projecting full year total sales to increase between 1-5%." These comments underscore the company’s strategic focus and confidence in future growth.

Risks and Challenges

• Potential supply chain disruptions could impact production timelines.
• Market saturation in certain segments may limit growth potential.
• Macroeconomic pressures, including inflation, could affect cost structures.
• Geopolitical tensions might influence global market dynamics.
• Dependency on key partnerships could pose risks if alliances shift.

Q&A

During the earnings call, analysts inquired about the commercialization timeline for bioprocessing, which is expected in FY 2027. Questions also focused on the company’s connected solutions, which are enhancing customer relationships. Executives expressed cautious optimism about market recovery and reiterated their commitment to strategic investments and cost management.

Full transcript - Donaldson Comp Inc (DCI) Q4 2025:

Tiffany, Conference Operator: Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Donaldson Company Q4 FY twenty twenty five Earnings Webcast. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session.

I would now like to turn the call over to Sarah Dagwall, Senior Director of Investor Relations and ESG. Sarah, please go ahead.

Sarah Dagwall, Senior Director of Investor Relations and ESG, Donaldson Company: Good morning. Thank you for joining Donaldson’s fourth quarter fiscal twenty twenty five earnings conference call. With me today are Todd Carpenter, Chairman, President and CEO and Brad Poggles, Chief Financial Officer. This morning, Todd and Brad will provide a summary of our fourth quarter performance and our outlook for fiscal twenty twenty six. During today’s call, we will discuss non GAAP or adjusted results.

For fourth quarter twenty twenty five, non GAAP results exclude pretax charges of $9,500,000 for restructuring and other charges, primarily related to footprint optimization and cost reduction initiatives. A reconciliation of GAAP to non GAAP 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.

Todd Carpenter, Chairman, President and CEO, Donaldson Company: Thanks, Sarika. Good morning. Fiscal twenty twenty five was a record year for Donaldson Company as we did what we do best, help our customers solve critical filtration challenges through the delivery of our high-tech solutions, which protect precision equipment and help maintain a cleaner work environment, increasing efficiency, mitigating risks and reducing downtime. We did this through consistent execution of our strategy and created value for our shareholders. I will start with some full year highlights, discuss our fourth quarter performance and touch briefly on our expectations for fiscal twenty twenty six.

Brad will then detail our financials. Lastly, I will provide some closing remarks before opening the call to questions. In fiscal twenty twenty five, we grew sales to an all time high of $3,700,000,000 with growth across all segments expanded operating profit margin to a record 15.7% with an incremental margin of nearly 30% delivered earnings per share of $3.68 towards the higher end of the guidance range we laid out at the beginning of the year returned $465,000,000 to shareholders, largely through repurchase of 4% of our shares outstanding while increasing our dividend 11% and focused our cost structure, including in Life Sciences and made progress towards footprint optimization, strengthening our foundation for future profitability while still investing for growth. Our team accomplished a tremendous amount in fiscal twenty twenty five through macro uncertainty and cyclical headwinds. We ended the year on a high note, and I will provide some details on the fourth quarter, including by segment.

In Mobile Solutions, our strength in aftermarket is contributing to record results as we continue to win and gain share. In our independent channel, which eclipsed $1,000,000,000 in sales this year, partnerships like NAPA allow us to expand our reach, and we continue to build these types of relationships. For example, in the fourth quarter, we signed a new partnership with Mighty Distributing System of America. Donaldson is Mighty’s sole heavy duty filtration supplier of Donaldson branded products, and we are pleased with the early results. With respect to our largest first fit business within mobile, off road, sales grew after eight consecutive quarters of declines as we see tangible signs of trough or moving out of trough conditions in the agriculture market.

For Industrial Solutions, IFS sales grew double digits through our create, connect, replace service model. I would like to touch on each piece briefly. Create. In dust collection, we are building new customer relationships and our OE channel sales hit record levels. Power generation sales were also strong as we continue to benefit from the power gen super cycle.

Connect. We are deploying our connected solutions. This quarter, we increased the number of connected machines and connected facilities. And in fiscal twenty twenty six, we expect to grow the number of connected machines over 30%. Through this, we are strengthening our customer relationships and building this revenue stream for the future.

Replace. Our razor to sell razor blade model is working with almost 50% of our quarterly industrial segment sales now driven by higher margin aftermarket sales. Service. This quarter, we acquired our third service business, RPS Associates of New England. RPS brings forty years of experience in dust collection services with customers in aerospace, defense and other metal manufacturing industries and also adds a new geography to our service footprint.

Moving to Life Sciences. Food and beverage sales grew over 20%, both in new and replacement parts sales. We are winning share through key OEMs and channel partners in this high margin business. In bioprocessing, through our downstream Purologic business, we announced the availability of the first manufacturing grade product within the Purexa portfolio to support customers’ GMP or good manufacturing processes. The Purexa membrane chromatography products enhance productivity with their high dynamic binding capacity, fast cycle times and efficient and scalable format, allowing users to process their product more quickly and reduce process costs.

Now I’ll cover some consolidated company highlights for the quarter. Overall, sales increased 5% year over year to $981,000,000 driven by volume growth, currency translation benefits and pricing. Adjusted EPS was 1.03 up approximately 10% year over year. I’m proud of our results and would like to give a special thanks to our global operations team who, once again this quarter, navigated the difficult macro landscape, including the ever changing global tariff dynamics. Brad will talk a bit more about the impact from tariffs, but I want to emphasize my confidence in the muscle we have built to address challenges quickly and effectively.

Also in the quarter, we progressed on our footprint and cost optimization initiatives. We remain in the heavy lift phase of this work and expect to be mostly complete by the 2026. Through this, we have stayed focused on our customer needs. On time delivery rates remain high, and our backlog support our outlook over multiple quarters. I’m also pleased with our thoughtful expense management.

While we lay the groundwork for a more efficient operating structure, it is important to note that we are making disciplined growth investments in strategically important areas through our r and d and capital expenditures, including in areas such as solvent recovery and new disk drive technologies in life sciences and air and alternative fuels filtration in mobile solutions, cementing our leadership position in diversified technology led filtration. Now I’ll provide some detail on fourth quarter sales. In Mobile Solutions, total sales were $588,000,000 a 2% increase versus prior year. Aftermarket sales were $468,000,000 up 3%, driven by strong demand in the OE channel from larger customers and market share gains in the independent channel. On the First Fit side, off road sales of $95,000,000 increased 5% as we cycled against weaker agriculture market conditions in the prior year.

On road sales of $26,000,000 declined 20% as a result of cyclical declines in global truck production. Now on our Mobile Solutions business in China. Sales grew 14% year over year with increases in first fit and aftermarket, marking the fourth consecutive quarter of growth. While we are still cautious in the near term on the overall market in China, we are encouraged by the traction we are gaining with local customers. This quarter, we won another hydraulics program with a local manufacturer in the agriculture market, a sign of customer confidence in the Donaldson value proposition.

Turning to Industrial Solutions. Industrial sales rose 8% to $310,000,000 IFS sales of $262,000,000 grew 11% from new equipment sales in dust collection in Europe and North America and power generation project timing. Aerospace and defense sales were $47,000,000 a 6% decrease driven by a decline in defense sales following the completion of a few large projects. In life sciences, sales of $82,000,000 rose 14% compared with prior year. Double digit growth in food and beverage and disk drive was partially offset by a decline in bioprocessing sales.

In total, our results this quarter capped off a tremendous year for the company. Looking ahead, Donaldson is well positioned to further strengthen our foundation and capitalize on improving market conditions and cyclical trends. As such, we are forecasting at the midpoint of our guidance ranges another record year in fiscal twenty twenty six with total sales of $3,800,000,000 inclusive of sales growth in each of our segments, an all time high operating margin of 16.4% ahead of the fiscal twenty twenty six target we laid out one year ago, and record earnings of $4 per share. Now I’ll turn it over to Brad, who will provide more details on the financials and our outlook for fiscal twenty twenty six. Brad?

Brad Poggles, Chief Financial Officer, Donaldson Company: Thanks, Todd. Good morning, everyone. I want to start by thanking the Donaldson team for delivering another strong year. We were navigating a complicated environment and had to make some difficult decisions, particularly related to structural cost changes, and the teams delivered. Our approach is simple, grow the company, grow profitability, maintain expense discipline, make thoughtful investments, and return cash to our shareholders.

We did that in fiscal twenty twenty five and expect to do it again in fiscal twenty twenty six. Now turning to a few highlights from the quarter. Note that my profit comments will exclude the impact from the restructuring and other charges Sarika referenced earlier. Total sales increased 5%. Operating margin was a record 16.4%, up 10 basis points over the prior year.

Adjusted EPS was 1.310% above the prior year. And as expected, cash conversion was strong at 123% as we successfully worked down inventory and delivered to our customers. Going further into the P and L, gross margin was 34.8%, down 140 basis points from 2024. The impact from tariff related inflation on our LIFO inventory valuation was significant this quarter. Expanding on this point, we use LIFO accounting for our U.

S. Business and can experience increased costs or benefits depending on whether we are in an inflationary or deflationary environment. The current inflationary environment resulted in higher costs accounting for nearly all of the year over year change. Said differently, excluding the impact of LIFO in fiscal twenty twenty five and 2024, gross margin would have been approximately flat to the prior year. In terms of underlying business gross margin, we remain in a solid position.

Productivity headwinds in the quarter from optimization projects are being offset by efficiency and fixed cost leverage in our facilities. And we continue to do an excellent job managing price versus cost, including those costs related to tariffs. Given the importance of the topic, I want to underscore our view that over time, we plan to be profit dollar neutral with respect to ongoing tariffs. We remain confident in this due to a few things. First, our region for region global footprint second, nearly 90% of our goods shipped from Mexico, where our biggest exposure lies, are USMCA qualified and currently exempt from tariffs and third, our pricing muscle, which is strong and supported by the high-tech value of our solutions and our ability to deliver reliably to our customers.

In addition to managing price versus cost, our team has successfully managed operating expenses during a fluid environment, including with restructuring actions. In the quarter, operating expense improved to 18.3 from 19.9% a year ago, a continuation of the positive trend we’ve seen all year. In terms of segment profitability, Mobile Solutions pretax profit margin was a record 19.1%, up 80 basis points year over year due to the timing of inventory adjustments and leverage on higher sales. Industrial Solutions pretax margin was also a record at 20.9%, up 80 basis points due to leverage on higher sales. Life Sciences pretax margin improved to 5.3% from a negative 1.2% a year ago.

Strength in high margin food and beverage and disc drive sales and leverage from an optimized cost structure across the segment more than offset continued investment in bioprocessing as we work to scale these businesses. Now I’ll walk through the details of our fiscal twenty twenty six outlook. First, on sales. We are projecting full year total sales to increase between 15%, with sales of $3,800,000,000 at the midpoint of this range. This includes pricing of approximately 1%.

The impacts from both currency translation and tariffs are expected to be negligible. For Mobile Solutions, we’re projecting sales to be flat to up 4%. We expect first fit sales to rebound after comparing against 2025, a year in which we saw significant end market weakness in agriculture and transportation. Off road sales are expected to grow mid single digits, and on road sales are projected to increase high single digits. Aftermarket sales are expected to grow low single digits from continued market share gains and vehicle utilization rates.

In Industrial Solutions, sales are forecast to grow between 26%, driven by a mid single digit increase in IFS, where sales are expected to improve across all businesses, including strategically important areas such as aftermarket and services. Aerospace and defense sales are projected to be flat after cycling against record levels in the prior year. In Life Sciences, we expect sales growth between 15% from continued momentum in our larger legacy businesses, food and beverage and disk drive. We also project an increase in segment profit margin in fiscal twenty twenty six, growing to mid single digits as a rate of sales and building on our momentum from 2025. For the total company, we are projecting full year operating margin once again at record levels and between 16.116.7%.

At the midpoint, this is a 70 basis point year over year improvement driven by gross margin expansion and expense leverage. Our expected performance represents an incremental margin of approximately 40%. Our EPS guidance is $3.92 to $4.08 centered on $4 per share. The midpoints of our top and bottom line guidance ranges represent 9% earnings growth on 3% sales growth, underscoring our ability to deliver higher levels of profitability on higher sales. During our Investor Day in 2023, we projected fiscal twenty twenty six operating margin at the midpoint of our guidance range to be 16%, along with an incremental margin over a cycle between 2024%.

While our end markets have not behaved as expected, taking the midpoint of our current fiscal twenty twenty six guidance ranges, we have more than delivered on our profit targets, demonstrating our strong commitment to margin expansion over time. Importantly, our profit growth is about long term structural changes that involve both subtraction and addition, meaning we are optimizing costs while investing in the most important strategic opportunities. Back to the fiscal twenty twenty six outlook. Cash conversion is expected to be in the range of 85% to 95%, a year over year improvement and consistent with historic averages. Our cash generation, combined with our low leverage ratio, gives us tremendous financial flexibility to invest for future growth, and that is always our top priority when it comes to strategic capital deployment.

From an organic perspective, we’re continuing to find new ways to penetrate new and existing markets through our R and D investments as well as capital expenditures, which are forecast between $65,000,000 and $85,000,000 and include key investments in new products and technologies across all of our segments. We are highly committed to expansion through M and A and actively work through a pipeline of opportunities, largely in our life sciences and industrial businesses. While we have the capability and the commitment, we are disciplined in our activities, pursuing opportunities with our strategic and financial criteria in mind. As we’ve demonstrated, the ongoing return of cash to shareholders is part of the Donaldson DNA and the value we create. Our financial performance has allowed us to pay and increase dividends annually for decades.

And calendar year 2025 is expected to be no exception, marking the thirtieth year in a row of increases, allowing us to maintain our constituency in the S and P high yield dividend aristocrat index. Further, in fiscal twenty twenty six, we are forecasting a repurchase of 2% to 3% of our outstanding shares. Through the strength of our global teams, technological expertise and deep customer relationships, we look forward to delivering for all of our stakeholders in fiscal twenty twenty six. Now I’ll turn the call back to Todd.

Todd Carpenter, Chairman, President and CEO, Donaldson Company: Thanks, Brad. Donaldson is the leader in technology led filtration, and we are strengthening that position. We have a proven history of focusing on our customers’ needs through all market conditions and continue to advance our value proposition through our strategic initiatives and disciplined investments. The essential nature of our products for customers enables our razor to sell razor blade model, which has penetrated across our business, fueling our durable, profitable growth today and for the future. Our success would not be possible without the talented Donaldson employees around the globe.

I would like to close by thanking them for their dedication and service, and I am excited about what we will collectively accomplish in the future. With that, I will now turn the call back to the operator to open the line for questions.

Tiffany, Conference Operator: Your first question comes from the line of Brian Blair with Oppenheimer. Please go ahead.

Brian Blair, Analyst, Oppenheimer: Thank you. Good morning, everyone. Good morning. Was interesting comment on ag demands being at trough or potentially moving off trough. That’s encouraging.

To level set on that, when did ag orders bottom for your team? What kind of growth are you seeing in the early part of fiscal twenty twenty six?

Todd Carpenter, Chairman, President and CEO, Donaldson Company: Yes, Brian. So this is Todd. When you really look at what ag has it’s a pretty low comp. And so consequently, it’s tough to imagine that it’s going to fall further. Ag, we feel bottomed within the quarter because we did see some slight uptick, but we’re not talking double digit uptick or anything like that.

We’re talking low single digits. And we were encouraged the fact that it has stopped falling.

Brian Blair, Analyst, Oppenheimer: Okay. Understood. And in terms of the commercialization of your your bioprocessing solutions, you know, we know that the timeline has been, delayed relative to earlier expectations. How should we think about fiscal twenty twenty six progression? And is there the prospect of growth inflection?

And with that, can bioprocessing in isolation get to breakeven EBIT or potentially inflect to profitability? So when

Todd Carpenter, Chairman, President and CEO, Donaldson Company: you look at the total Life Sciences segment, our traditional businesses, they’re doing quite well, performing to all profit expectations, etcetera. They’re growing nicely, clearly carrying the day within the life sciences guide. When you then get into the upstream portion of bioprocessing, that’s more muted. Clearly, as capacity expansion, large projects, those still have not seen any kind of a turnaround creating headwind in the business. Then the then the second piece of this would be of the bioprocessing story would be the downstream application piece where we’re creating new products to bring those out to market to create revenue and growth in that fashion.

That is taking a little bit longer to get those projects to market. We made really good progress in ’25. We do not see the revenue expectation really with a high kind of a bounce in ’26. That’s likely more in the ’twenty seven time frame as we get through testing of those products and bring them to market perhaps as in the later part of fiscal ’twenty six. Some of those products have been released.

You saw those kind of announcements with our Purexxa type of a brand as well. Isolare Bio has also released some of those. But, you know, we we still have more to more to release. And and so you baked all of that into the life sciences guide, and that’s where you see the mid single digit growth and where it’s coming from.

Brian Blair, Analyst, Oppenheimer: Got it. I appreciate the color there. One more quick one, if I may. The ISS outlook for mid single digit growth, how is your team thinking about first fit versus aftermarket revenue growth this year, the latter obviously being inclusive of service revenue?

Todd Carpenter, Chairman, President and CEO, Donaldson Company: So first fit within that business is bit mixed by region. The U. S. And Europe continue to be strong. APAC is a little bit more troubled.

LATAM is certainly troubled. But it’s really a replacement part story at this point in time for us because we continue to gain share as a result of our strategies, good execution. We do expect The US to hold and we continue to take first fit share. But really, it’s largely a replacement part story within that business. Replacement parts were up broad based across our industrial sector and particularly within IFS in in multiple regions.

Brad Poggles, Chief Financial Officer, Donaldson Company: Brian, this is Brad. I’ll I’ll add one point is that I think what’s encouraging about our plan is that it’s also broad based across the different businesses within IFS. It’s not as though the IFS growth is is predicated on one business really hitting hard, and then everything else is is lukewarm. We we expect this solid performance over the course of the year across all these businesses.

Brian Blair, Analyst, Oppenheimer: Understood. Thanks again.

Tiffany, Conference Operator: Your next question comes from the line of Nathan Jones with Stifel. Please go ahead.

Nathan Jones, Analyst, Stifel: Good morning, everyone.

Todd Carpenter, Chairman, President and CEO, Donaldson Company: Good morning, Nathan.

Brian Drab, Analyst, William Blair: I guess

Nathan Jones, Analyst, Stifel: I’ll follow-up on Brian’s bio question. Obviously, the market there hasn’t done you any favors over the last few years in terms of kind of hitting those Investor Day targets from a few years ago. What is it that you really need to fundamentally see change in those markets in order for you to see that ramp up in growth that we’ve been waiting for as you started to get into these markets?

Todd Carpenter, Chairman, President and CEO, Donaldson Company: So first, we have to get our new product development across the finish line, be able to really produce that at scale that the customers really would like to see. We’re in laboratories with tests. It’s all of our products are very well received. They really love them. And and we’re just finalizing the development of of being able to sell those at scale, making sure we have GMP manufacturing capabilities.

And it’s so those so those later phases of getting it ready for production is kind of where we are. We’ve gotta we’ve gotta finish that off, and then we should be able to see some market market pickup. But overall early returns as far as the capabilities, the differentiation, the disruption that it could cause are really positive. But when we see the growth, it will be likely more in ’27 where we really start to commercialize.

Nathan Jones, Analyst, Stifel: Okay. Guess that’s the other question I wanted to ask about was on the connected side. I think you were talking about 30% increase in number of connected products in dust collection that you have out there. I mean, are we talking that going from 3% to 4% or 30% to 40% connected? And then I guess a follow-up question to that is how do you monetize that?

Is this something that you can monetize on its own? Or is this kind of value that’s provided to the customer that results in pulling more hardware through rather than like a subscription model or something like that? Thanks.

Todd Carpenter, Chairman, President and CEO, Donaldson Company: Yeah. So Nathan, it is not a subscription model. It is really deepening the customer relationships to be able to have them really manage their equipment more efficiently, either from energy savings and giving them more uptime. And then that deeper customer relationship really allows us to do more business with them on a per piece of equipment basis in in all of the replacement parts as well as services. And and we have proven with the thousands that we have connected that we absolutely increase our replacement parts activities when we connect a piece of equipment versus a non piece of equipment.

You see that as one of the drivers. There were years ago where our IAF business would be more 60% to sixty five percent first fit and then 35% to 40% replacement parts. Today, we’re at fifty-fifty. So you can see how that replacement parts and that connected based products is really helping us mix that particular profitability up, and that’s the importance of that strategy.

Nathan Jones, Analyst, Stifel: Great. That makes perfect sense. Thanks for taking my questions.

Tiffany, Conference Operator: Your next question comes from the line of Brian Drab with William Blair. Please go ahead.

Brian Drab, Analyst, William Blair: Hi, good morning. What you guys have done with the margins over the last four years is pretty incredible. And I’m just wondering, you talk about a little bit further about how how you get 40% incremental operating margin, in in fiscal twenty six after such strong incremental this this year? It’s going even higher. Maybe just start there, then I have a follow-up.

Brad Poggles, Chief Financial Officer, Donaldson Company: Sure. Hi, Brian. This is Brad. First off, if you just pick the midpoint of our our op margin range, sixteen four, that’s about 70 bps up from prior year. The largest portion of that is coming from gross margin expansion, and then we are gonna get some expense leverage as well.

Given the more muted sales environment that we’re dealing with, we’re continuing to push for a structural, to benefit from the structural cost reductions that we had this year. So we’ll expect expenses to stay very under control. And then the gross margin is is bouncing back a little bit from the LIFO that I mentioned, but we’re also able to, we do expect to offset the tariff impact. Price versus cost will remain okay for us. And then on top of it, it’s as we get through some of the, footprint work, we’re gonna start lapping the heavier lift there later in the year, and that’ll give us a little bit more of a tailwind.

I’m talking basis points here. I’m not talking points. But overall, the the formula for that incremental, I think, given the environment is is pretty positive. And, obviously, we’re we’re, you know, celebrating that a bit too.

Brian Drab, Analyst, William Blair: How how do you expect it to trend throughout the year, you know, the operating margin? Is it gonna be moving up throughout the year, or is it a big step up in the second half? Or, you know, how does it look?

Brad Poggles, Chief Financial Officer, Donaldson Company: Yeah. We’ll we’ll continue to move we’ll we’ll continue to step up over the year. And then one thing, just just to give some perspective on on how to think about it in terms of the semesters, we often talk about our our sales being tilted towards the back half. You know, it’s kind of a 48, 52, 49, 51. I can tell you profit margin is is typically more tilted than that.

So, you know, by several points difference where the back half is gonna generate more profit as we get a little bit of a sales pickup and then leverage fixed costs as well.

Laurence Alexander, Analyst, Jefferies: Okay.

Brian Drab, Analyst, William Blair: Now in in a in a situation where you hit the midpoint of the guidance, you mentioned one point of price, so that would give us, 2% volume growth for fiscal twenty twenty six. How does that look in terms of a progression throughout the year? The growth rate is can you talk about what growth rate you’re expecting each quarter?

Brad Poggles, Chief Financial Officer, Donaldson Company: Yeah. I would say you can you can look at a two year as a bit of a smoothing mechanism, but it it looks in fiscal twenty six that that quarter by quarter percent increase looks much less dramatic than it did in fiscal twenty five. In terms of volume versus price, we’re actually fairly consistent with pricing quarter by quarter. There are some moments where as we implement new pricing, we typically do in certain markets in January, so there’s a little bit of a step up there. But overall, it’s that’s much more muted.

The the variability then comes from volume tends to come from volume.

Brian Drab, Analyst, William Blair: I I guess I didn’t really understand the first part of it. Like, is there a chance that you’re gonna see, like, one like, a first half of the year that’s flat and the second half up 4% in terms of volume? Or or is that 2% pretty smooth throughout the year? Sorry if I missed

Brad Poggles, Chief Financial Officer, Donaldson Company: No. No. No. It’s it’s okay. It’s plus or minus.

But, again, I would I would point you back to the the, you know, $48.52 ish for the sales mix. That’ll that’ll get you where you need to be.

Brian Drab, Analyst, William Blair: Yeah. Understood. Okay. I’ll pass it on. Thank you.

Brad Poggles, Chief Financial Officer, Donaldson Company: Thanks, Brian.

Tiffany, Conference Operator: Your next question comes from the line of Laurence Alexander with Jefferies. Please go ahead.

Laurence Alexander, Analyst, Jefferies: Good morning. I guess, first of all, just near term on demand. Can you give a little bit of detail on what you’re seeing in China and the mix there aftermarket versus First Fit now. Regards commentary backlogs, can you characterize how current backlogs compare with, I don’t know, whatever you view as like typical? And then I have a longer term question.

Todd Carpenter, Chairman, President and CEO, Donaldson Company: Sure. So hitting those two real quick. So China incoming orders are up. Obviously, easier comps. We’re pleased to see some positive economic progression there within the quarter, but we also remain cautious, a little bit cautiously optimistic with China.

And is China going to be strong going forward? Not sure. So we’re a bit more careful on the outlook of China. Our team continues to execute real well there. We continue to win new projects.

And so we continue to be optimistic, but also very careful. Relative to overall company backlogs, I would tell you our backlogs support the guide. We feel very comfortable with that. Also very important is our late backlog as as a percent of sales are now below pre pandemic levels. And and that really is the reason for my comments in the opening remarks congratulating our operations team who just had a fantastic year taking care of our customers and helping us grow our business.

Laurence Alexander, Analyst, Jefferies: And then with respect to the margins, I wanted to see see if I can frame this in a way that you’re you’d be willing to nibble on or answer somewhat. If you think about the parts of the business that have the weakest end markets currently, can you characterize their margins relative to the rest of the company? And really what I’m trying to get at is it’s been quite a while since we’ve seen multiple years of decent end market demand. If you did get three, four years of decent end markets, not sort of red hot, but decent, is it reasonable to think that your margins for the overall company could move into the low 20s, given the incremental margins you’ve been consistently posting? Or is there anything structural in your mix that would be an obstacle to that?

Brad Poggles, Chief Financial Officer, Donaldson Company: Hi, Lawrence. This is Brad. So I’ll I’ll I’ll nibble. I think I think the first thing is the composition and the stratification of margins is important. It’s no secret.

We’ve talked about it for a very long time. In the spectrum of our businesses, OEs tend to have a lower margin gross margin rate than than the rest of the company. So to your question, as we expect that those will rebound at some point, we don’t know when. Hopefully, we are at this bottom level we’ve talked about. But that would that would create some mixed pressure within our gross margins.

But at the same time, we we feel like we’re in a very good position with our structural costs and and things like our footprint optimization, consolidation of plants. All of this gives us a chance to leverage more aggressively than probably we would have in in prior periods before this work was done. So I’m not going to peg it to a number, but as you talk about 20s, it’s for us, the idea of continuing to expand our operating margin is absolutely alive and well.

Angel Castillo, Analyst, Morgan Stanley: Thank you.

Tiffany, Conference Operator: Your next question comes from the line of Angel Castillo with Morgan Stanley. Please go ahead.

Angel Castillo, Analyst, Morgan Stanley: Hi, good morning and congrats on the solid quarter here. Just hoping Thank we could expand a little bit more. Yes, you’re welcome. I was just hoping we could expand a little bit more on maybe the kind of quarterly or first half versus second half cadence. I know you talked about ag and some of the other kind of, puts and takes within some of their segments.

But if we could kind of go sub segment, off road, on road, IFS, A and D, just how you think about each of those kind of first half versus second half? And where you’re kind of seeing already fiscal 1Q type of trends in line with guide and where you kind of anticipate a little bit more of a second half pickup and kind of what drives that confidence?

Brad Poggles, Chief Financial Officer, Donaldson Company: Angel, this is Brad. I’ll start. If we think about the first fit markets, I really do want to reiterate a point Todd made earlier. It’s not as though we’re expecting some remarkable change in the markets. So if you think about it from from over the course of the year, we would expect it to get better.

That creates maybe more outsized movement in terms of the year over year increase, especially with on road. Just, you know, we said high single digits. And I just wanna point out, high single digits is millions of dollars, not tens of millions of dollars, given the relative size of this business. So I think that’s an important part as we look through the year. Just, you know, kind of smoothing it out.

Again, I’m I’m kind of a a two year stack person with some of these OE businesses because the the comps have been noisy. Another one you brought up is aerospace and defense. And if you look quarter by quarter this current year, that was a very lumpy business due in part to orders, due in part to our ability to fulfill with our supply chain and and more supplier constraints than ours. So that creates a little bit more of a a dynamic approach by quarter. But I think as you’re thinking about the total company settling into what I said earlier in an earlier question about that $48.52 is is an important starting point.

Angel Castillo, Analyst, Morgan Stanley: That’s helpful. Thank you. And then I wanted to go back to maybe capital allocation. Could you give us a little bit more maybe update or thoughts on kind of the M and A pipeline, just your appetite for buybacks kind of beyond the 2% to 3% shares of shares outstanding. Then just on CapEx, your guidance, I think it implies kind of a decline year over year at the midpoint.

Can you just talk about what kind of the factors that are driving that? And maybe what does how should we kind of read this from an organic investment opportunity and as well as kind of potential benefits from OPBBA or other kind of assessments of what that decline in CapEx means?

Brad Poggles, Chief Financial Officer, Donaldson Company: Sure. This is Brad again. I’m going to start, and then I’ll let Todd pick up on the M and A side. But as far as CapEx, if you think as a rate of sales, in that 2%, 2.5% range, fairly consistent. I would say, like, we’re talking about with lots of our customers, we’re we’re being very smart and sharp with our prioritization so that we’re not introducing a lot of projects at a time where the world is still a bit more uncertain.

So I for me, I wouldn’t read too much into that. It’s more about we we snapped a chalk line higher up on the list of good ideas versus lower on the list. Should things loosen up, obviously, we’ll we’ll make sure that these are the right investments. Share repurchase, obviously, last year, we we juiced it at around the 4% level. And I think for us, it’s about always having a balance.

So to the extent that we can keep dry dry powder for possible m and a and continue to give cash back to shareholders, that’s it. There’s nothing real precise about that calculation as much as it’s an ongoing conversation that Todd and I have as we think about how to best use our money at the time. So so the 2% to 3% is much more of a normal. That’s kind of where we started last year. We’re typically in the two ish percent range.

And again, I think this is about starting the year with more of a normal position.

Todd Carpenter, Chairman, President and CEO, Donaldson Company: And then just, Billy, on your M and A question. So our capital priorities have not changed. They remain invest in the company for organic growth by companies. So take care of and continue to invest for inorganic growth, dividends and then share buyback. And then so we still have an appetite for M and A.

We still have a strong balance sheet that allows us to do that. We still have teams working on that. We have a very good pipeline. It’s obviously strategic and focused. And we continue to work on that, and we’ll continue to do so as part of our ongoing strategy.

Angel Castillo, Analyst, Morgan Stanley: Very helpful. Thank you.

Tiffany, Conference Operator: Your next question comes from the line of Tim Fine with Raymond James. Please go ahead.

Brian Drab, Analyst, William Blair: Thank you. Good morning. I had a question first on the aftermarket business, specifically in the mobile segment. And Todd, you mentioned the high utilization rates as one of the kind of the sound bites there. Can you maybe go a little bit further in terms of in the outlook, I mean, you go through some of these markets and obviously it’s a global company, but your largest market in North America, we’ve been depressed for some time on a first fit basis.

I’m just curious in your outlook in terms of by segment or as you look through the different channels, what you’re hearing from dealers, from customers in terms of just kind of the underlying change in activity? Is it a stocking level? Is there anything that you can expand a bit further in terms of what’s kind of driving your outlook for that part of the business.

Todd Carpenter, Chairman, President and CEO, Donaldson Company: Sure. If you look at our mobile solutions aftermarket, remember, 40% of that business is OE and 60% is in the independent channel. In 2025, the year we just finished, our OE business had a bounce. They were really restocking, if you will, and our independent channel was a bit more muted. Going forward, given the share gains that we have in the independent channel, we’re very proud to have hit $1,000,000,000 within that segment last year.

We do have share gains that we’ve baked into our forward look. We would expect more of an increase on the independent channel than the OE channel in ’26. That’s what we’ve baked into the guide. So they’re kind of on different timing on each other. But you wrap that all together, we’re still gaining share and still would expect to grow that business, particularly in The U.

S.

Brian Drab, Analyst, William Blair: Okay. And I’m guessing you don’t want to get too fine lined on this. But is the opportunity with Mighty, is it in a similar kind of should we think about that in a similar ZIP code as in terms of the benefit from NAPA or any help on that?

Todd Carpenter, Chairman, President and CEO, Donaldson Company: Sorry, we’re not going give you any help on that. We’re just proud to have them on board and actually having a strong relationship building with them. We’re really not going to guide on a single customer going forward.

Brian Drab, Analyst, William Blair: Okay. Last quick one, Todd, just on the you mentioned that this power gen super cycle, any comments there in terms of backlog coverage? Is that getting to the point where you’re starting it into conversations? I’m guessing you’re booked further out than normal. Any color just on that specific piece of industrial?

Todd Carpenter, Chairman, President and CEO, Donaldson Company: Sure. That business is full. The capacity, we could probably sell, if we had more capacity, more. But within that business, those projects are difficult to execute. And so we remain very focused on executing.

We do not see an end in sight. There has been no indication of the super cycle cooling at all. And so we’re really happy with our position. The customers are happy. We’ve been delivering quite nicely.

That that just continues at a minimum through this full fiscal year. And you’re right. We have a very long well, it’s probably the longest look on backlogs in the company at this time.

Brad Poggles, Chief Financial Officer, Donaldson Company: Tim, this is Brad. I just wanna I just wanna add a little pile on to the power gen. The other thing that I think is is really a testimonial to the team is there’s still projects that we lose in that space because we’re setting a certain price threshold. And we’re committed to not taking bad business in these spots if it doesn’t meet our return criteria.

Brian Drab, Analyst, William Blair: Understood. Thank you.

Tiffany, Conference Operator: Your next question is from the line of Brian Drab with William Blair. Please go ahead.

Brian Drab, Analyst, William Blair: I’m sorry if this was just asked, but you just said you wouldn’t talk about a specific customer. But my question was going to be you’re forecasting growth in these end markets, the heavy duty end markets that have been really challenged. And you also mentioned some incremental distribution wins, which you mentioned upfront. So I imagine are somewhat important or material. But I’m just wondering, is your increased distribution presence contributing to your positive outlook and maybe outgrowing the market in the near term?

Todd Carpenter, Chairman, President and CEO, Donaldson Company: Yes. As well as other share gains as well. It’s not just a single customer there. It the team with our Mobile Solutions aftermarket organization is doing excellent work. They continue to expand Donaldson presence, take care of the customer, win important customers.

They’re just doing a great job, and we’re benefiting from it. And then we bake that into the guide.

Brian Drab, Analyst, William Blair: Yep. Okay. All right. Thank you very much.

Tiffany, Conference Operator: Your next question comes from the line of Tim Thein with Raymond James. Please go ahead.

Brian Drab, Analyst, William Blair: Sorry, last one for you. Todd, it was a quarter or two ago, you were kind of skeptical or you pushed back a bit on this notion of a potential reshoring, re industrialization, large project surge in North America, not surge, but pickup. As you talk to customers, is that kind of big project quoting pipeline? Have you seen any change in either direction on that? Or has the tone of your customer conversations changed at all?

Todd Carpenter, Chairman, President and CEO, Donaldson Company: My tone doesn’t change. I would say our teams, particularly sales teams within first fit equipment in The U. S. With for our industrial segment is doing excellent. We did have nice growth last year, particularly within the dust collection side of things.

We expect more this coming year. The quote backlog is solid. Things have not abated at all. But I would also say it hasn’t really accelerated to a notable degree worth mentioning here. It’s just we’re we’re doing a good job.

We’ve got good products. We’ve got good people to take care of the customers, and and we’re executing quite well, and and we’re very proud of that.

Angel Castillo, Analyst, Morgan Stanley: Thank you.

Tiffany, Conference Operator: That concludes our question and answer session. I will now turn the call back over to Todd Carpenter for closing remarks.

Todd Carpenter, Chairman, President and CEO, Donaldson Company: That concludes today’s call. Thanks to everyone who participated. We look forward to reporting in about ninety days our first quarter results. Have a great day. Goodbye.

Angel Castillo, Analyst, Morgan Stanley: Ladies

Tiffany, Conference Operator: and gentlemen, this concludes today’s call. Thank you all for joining.

Angel Castillo, Analyst, Morgan Stanley: You

Tiffany, Conference Operator: may now disconnect.

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