Donaldson Company, Inc.

Donaldson's fourth quarter and full year fiscal 2024 earnings conference call. With me today are Todd Carpenter, Chairman, CEO, and President, and Scott Robinson, Chief Financial Officer. This morning, Todd and Scott will provide a summary of our fourth quarter and full year performance and details on our outlook for fiscal 2025. We will also provide an update on our fiscal 2026 financial targets. During today's call, we will discuss non-GAAP or adjusted results. For fourth quarter and full year fiscal 2024, non-GAAP results exclude pre-tax restructuring and other charges of $6.4 million related to footprint optimization and cost reduction initiatives. This compares to $4.9 million and $21.8 million of charges in fourth quarter and full year fiscal 2023, respectively, related to the organizational redesign, as well as costs associated with exiting a lower-margin customer program. A reconciliation of GAAP to non-GAAP metrics is provided within the schedules attached to this morning'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'll now turn the call over to Todd Carpenter. Please go ahead.

Thanks, Sarika. Good morning. Fiscal 2024 was another record year for Donaldson Company. Record sales, record margins, and record EPS. We surpassed $3.5 billion in sales, achieved operating margin of 15.4%, and delivered adjusted EPS of $3.42 a 13% increase above prior year. Our cash conversion was over 97%, well above our historical average, and we returned $286 million to our shareholders through dividends and share buybacks. Through mixed and market conditions, the Donaldson team furthered our mission of advancing filtration for a cleaner world through our investments and progress on our strategic initiatives, including our 2030 ESG ambitions. I'll now discuss our fourth quarter results, which capped off a tremendous year for our company. Sales increased 6% over prior year, driven by higher volumes across all three operating segments. Operating margin improved 200 basis points over 2023, and EPS increased 21%. Each of our segments demonstrated sales growth and improved profitability. Here are some highlights. In mobile solutions, volume was the primary driver of sales growth as a result of strength in our aftermarket business. Segment profitability continued to be robust as a result of mix, higher volumes, and pricing. In industrial solutions, aerospace and defense sales rose approximately 40% to a record level and drove industrial profit margin to an all-time high. In life sciences, sales grew above 20% and profitability improved year over year. Shortly after the end of the quarter, we completed the acquisition of a 49% stake in Medica SDA, a leader in hollow fiber membrane technology and retain a call option to purchase the remaining 51% stake in the years to come. We are pleased with this investment and our joint development agreement as we work towards developing and commercializing hollow fiber modules for applications including bio processing and food and beverage. Throughout the quarter, we maintain our focus on strong and consistent execution for our customers to our best in class operations teams and global footprint. With relatively stable supply chain conditions, we significantly improved on time delivery rates and our backlogs remain in great shape as we begin fiscal 2025. We executed and also laid the groundwork for the future through R&D and capital expenditures. R&D investment increased approximately 16% over 2023 and included product development initiatives in our legacy and newly acquired businesses. Capital expenditures were primarily focused on increasing capacity and expanding new products and technology, including in our life sciences segment. Now some detail on fourth quarter sales. Total company sales were $935 million, up 6% year-over-year, driven primarily by volume. Price contributed approximately 1%. In mobile solutions, total sales were $575 million, a 6% increase versus 2023. Aftermarket sales grew 13% to $453 million, driven by solid growth in both the OE and independent channels. OE channel sales were up high teens versus prior year, benefiting from a return to more normalized levels of demand following destocking in the prior year. In the independent channel, sales increased high single digits as a result of improved product availability and market share gains. The strength in aftermarket was partially offset by continued declines in our first-bit businesses. Off-road sales of $90 million decreased 13% as weak agriculture markets persisted in most regions. On-road sales declined 12% to $33 million due to lower equipment production in China and the United States. I'll provide some additional color on our mobile business in China where the macro environment remains difficult. Sales decreased 19% year-over-year, driven by declines in our first-fit businesses. While China now represents a low single-digit portion of total segment sales, it remains a strategically important area for us over the long term. We are optimistic about our ability to gain share over time through programs already won and through our technology-led products as regulations become tighter and as Chinese manufacturers compete in Western markets. Now on the industrial solution segment. Industrial sales increased 4% to $288 million. Aerospace and defense sales rose 40% to $50 million, driven by robust commercial aerospace and rotorcraft markets, as well as ongoing demand in defense due to the modernization of equipment and the impact of global conflicts. Industrial filtration solutions, or IFS, sales declined 1.5% from weaker dust collection demand in Europe and power generation project timing. In the life sciences segment, sales were $72 million, up 21% year over year, largely as a result of disk drive sales, which continued to rebound from trough levels a year ago. Food and beverage sales also increased in the quarter. Looking to fiscal 2025, Donaldson is poised for another record year, delivering value to our shareholders through record sales and record earnings. We are forecasting a sales increase between 2% and 6% driven by solid growth in all three segments, adjusted operating margin between 15.3% and 15.9%, and adjusted earnings per share between $3.56 and $3.72. Given fiscal 2024 results and our projections for fiscal 2025 and 2026, we are also taking the opportunity to update our fiscal 2026 financial targets previously laid out at our last investor day. First, on sales. We now expect consolidated sales to increase at a three-year CAGR between 3% and 7%, slightly below our previous 4% to 8% projection. Our updated view is driven by a slower-than-expected sales ramp-up in life sciences, where biopharmaceutical markets have slowed. Our outlook for mobile and industrial solutions is unchanged. With respect to consolidated operating margin, our fiscal 2026 target range is now 15.8% to 16.6%, slightly above our previous range of 15.6% to 16.4%, with mobile and industrial operating margins far exceeding our previous expectations and with the path to life sciences operating margin strength elongating. Our mobile and industrial businesses have benefited from sales mix, volume growth, pricing, and deflation of select input costs, and we expect current profitability levels to continue. With respect to life sciences, we now believe the ramp up in profitability will take longer than initially expected given macro pressures and constrained customer capital spending, particularly for early stage assets. Our view of sales and profitability mix in the three-year projection period since investor day has somewhat changed. However, our ability to return value to our shareholders through higher levels of profitability on higher sales has not. We remain committed to and confident in our long-term strategy of utilizing our diversified technology-led portfolio of businesses to further penetrate existing markets and enter into new markets. Now I'll turn it over to Scott, who will provide more details on the financials and our outlook. Scott?

Thanks, Todd. Good morning, everyone. I would like to start by thanking our teams around the globe for their hard work. We had a terrific quarter, which concluded a terrific year. Our employees delivered for our customers and our shareholders, and I am proud of what we accomplished. Before I cover our outlook, I will provide details on fourth quarter results. EPS grew 21% year-over-year to 94 cents on 6% sales growth. Operating profit increased 21%, and operating margin was 16.3%, 200 basis points above 2023, driven by gross margin expansion and operating expense leverage. Gross margin of 36.2% increased 190 basis points above prior year from select input cost deflation and leverage on higher sales. Operating expenses as a percent of sales were 19.9% versus 20.0% a year ago from leverage on higher sales, partially offset by higher people-related costs and acquisition-related expenses. Now we'll discuss segment profitability. Mobile Solutions' pre-tax profit margin was 18.3%, 210 basis points above prior year, due to favorable mix from strong aftermarket performance, volume growth, and pricing benefits. Improved manufacturing efficiency in our plants also contributed to strong performance. Industrial Solutions pre-tax profit margin was a record 20.1%, 90 basis points above a tough comparison 19.2% in the prior year period. The year-over-year improvement was driven by volume and pricing. Our margin performance in both mobile and industrial has been outstanding all year pushing Donaldson's blended margins to record levels. We look forward to continuing this robust performance in the years to come. Our life science business generated a pre-tax loss of approximately 1%, including a headwind from acquisitions of 15% points. This compares to a pre-tax loss of 12% in the prior year period. Leverage on higher sales from our legacy businesses drove the improvement. While profitability in this segment has been negatively impacted by a slower acquisition-related sales ramp combined with investments for growth, we are committed to and confident in the scaling of our acquisitions and to long-term profitable growth in this segment. Turning to a few balance sheet and cash flow statement highlights. Fourth quarter capital expenditures were approximately $19 million. Cash conversion in the quarter was 93% above historical averages and on par with prior year as our focus on working capital efficiency continued. In terms of under capital employment, we returned approximately $82 million to shareholders, inclusive of $32 million in the form of dividends and $49 million in share repurchases. Before turning to our fiscal 25 outlook, I will touch on the footprint and cost optimization program we put in place this quarter, which resulted in pre-tax charges of $6.4 million, or approximately $0.04 of EPS. One of Donaldson's core strengths and competitive advantages is our global footprint. With investments in every major region, we are able to support the production and distribution of our innovative and high-growth products in region for region. As our business evolves, we continually strive to optimize our footprint and have identified certain projects resulting in improved efficiency. Now our fiscal 25 outlook. First on sales. We forecast full-year total sales increase between 2% and 6%. This includes a pricing benefit of approximately 1% and an immaterial impact from currency translation. For mobile solutions, we are expecting an increase of between 0% and 4%, with growth in aftermarket and off-road more than offsetting on-road declines. Aftermarket sales are projected to increase low single digits after lapping solid results in the prior year as vehicle utilization rates remain high and as we continue to gain market share. Off-road sales are forecast to increase low single digits for market share gains partially offset by weaker demand from softer end market conditions, including in agriculture and construction. On-road sales are expected to decrease low double digits as we exit certain non-strategic products and as global heavy-duty truck production remains muted. Industrial solution sales are projected to grow between 4% and 8%. IFS sales are expected to increase high single digits with strains across most businesses, including dust collection, industrial hydraulics, and industrial gases. Aerospace and defense sales are forecast to be flat year over year at high levels due to the lapping of an outstanding 2024 with the backdrop of supportive end market conditions. For life sciences, we expect an increase of low double digits driven by sales growth across all businesses. Our legacy businesses, including disk drive, food and beverage, and vehicle electrification are all poised for strong performance, and we are pleased with the progress we have made on integrating our bioprocessing acquisitions. As Todd mentioned, challenging market conditions and tightened customer capital spending have dampened our expectation for the segment in the near term. We expect profitability to be approximately break-even for the full year. On a consolidated basis, we are forecasting adjusted operating margin between 15.3 and 15.9%, driven by sustained gross margin performance. At the midpoint, this represents an all-time record for the company and compares to an adjusted operating margin of 15.4% in 2024. Our all-worth for interest expense is approximately $21 million, on par with the prior year. Other income net is forecasted to be between 16 and 20 million, up from 13 million a year ago. Our tax rate is forecast between 23 and 25%, an increase from 22.7% in fiscal 2024 due to a reduction in discrete tax benefits. For adjusted EPS, we expect between $3.56 and $3.72 a $0.22 or 7% increase at the midpoint from adjusted EPS of $3.42 in the prior year. In total, in fiscal 2025, we are well poised to once again deliver higher levels of profitability on higher sales. Now onto our balance sheet and cash flow outlook. Cash conversion is anticipated to be in line with historical averages at 85% to 95%. Capital expenditures are projected between 85 million and 105 million, and will continue to include growth investments, including capacity and new products and technologies. Our capital appointment strategy has not changed. Reinvestment back into Donaldson, organically or inorganically, is our top priority. To that end, our R&D investments are forecast to continue to increase, and our M&A focus areas remain life sciences and industrial services. We also intend to continue our long history of paying and increasing our dividend. Lastly, we plan to repurchase approximately 2 to 3% of shares outstanding. Before turning the call back to Todd, I will provide some additional details on our updated fiscal 2026 financial targets. For mobile solutions, our sales outlook is unchanged. From a profitability standpoint, given our recent outperformance and expectations for continued strength, we are increasing our fiscal 2026 targeted operating margin range to between 18.1 and 18.9%, which at the midpoint is up 250 basis points from the initial range of 15.6 to 16.4%. In industrial solutions, our sales outlook is also unchanged. However, given recent higher than expected profitability trends and our forecast for continued leverage from higher sales, we have increased the operating margin range to between 17.8 and 18.6%, which at the midpoint is over 100 basis points of improvement from 16.6 to 17.4 previously. For life sciences, we are reducing our sales and margin expectations given the aforementioned market dynamics. We now look for sales to increase at a 12% to 16% CAGR over the three-year period versus 18% to 22% previously and forecast profitability between 5% and 11% below our previous range of 22.1% to 22.9%. Importantly, for the consolidated company, while we have lowered our total sales growth expectation to between 3% and 7%, from 4% to 8% previously, we have improved our profitability outlook to between 15.8% and 16.6%, which at the midpoint is 20 basis points above our previous target. I'll now turn the call back to Todd for some closing remarks.