Donaldson Company, Inc.

Good morning and welcome to Donaldson's third quarter fiscal 2025 earnings conference call and webcast. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. Today's conference is being recorded. I would now like to turn the call over to Sarika Dodd-Wall, Senior Director of Investor Relations at ESG.

Please go ahead. Good morning. Thank you for joining Donaldson's third quarter fiscal 2025 earnings conference call. With me today are Todd Carpenter, Chairman, President, and CEO, and Brad Pogles, Chief Financial Officer. This morning, Todd and Brad will provide a summary of our third quarter performance and our updated outlook for fiscal 2025. During today's call, we will discuss non-GAAP or adjusted results. For third quarter 2025, non-GAAP results exclude pre-tax charges of $62 million for the impairment of certain intangible assets for our two upstream bioprocessing businesses, Universal Technologies and Solaris. Results also exclude pre-tax charges of $4.2 million for restructuring related to footprint optimization and cost reduction initiatives, $800,000 for business development, and a $1.2 million gain on the sale of fixed assets. 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.

Thanks, Sarika. Good morning. This quarter, the Donaldson team once again showcased our ability to deliver record sales and record adjusted earnings withstanding macro uncertainty, including fluid tariff policies and end market pressures. Supported by the durability and strength of our razor to sell razor blade model, excluding currency impact, we grew sales in all three segments. I am proud of our results. With our solid financial performance, the strength of our balance sheet, and an unwavering confidence in our ability to create long-term value, we repurchased an above-average number of shares in the quarter. In addition, last week we announced an 11% increase in our quarterly dividend. Donaldson Company is in a position of strength. Earnings growth has outpaced sales growth for seven quarters in a row due in large part to operating margin expansion. We continue to make long-term investments in the company with sharp prioritization of technology opportunities and targeted capital expenditures. And we deploy a significant amount of cash to our shareholders through dividends and share repurchase. That has been our story. And that will continue to be our story. Before getting into highlights from this quarter, I would like to acknowledge yesterday's announcement on the appointment of Rich Lewis as Chief Operating Officer, effective August 1st. His current role as President of Life Sciences and his track record of delivering operational success throughout his 23-year Donaldson tenure, including as President of Mobile Solutions, position him well for success, and I look forward to partnering with Rich to further strengthen our execution across the organization. Now I'll cover some highlights from this quarter within each of our segments. In mobile solutions, sales grew in constant currency driven by our aftermarket business as we continue to gain share and post solid growth across all regions and across both the OE and independent channels. As a reminder, recurring revenue from aftermarket parts makes up between 75 and 80% of sales in this segment. It is this solid foundation that helps us withstand the natural cycles in new equipment production. Additionally, while our first fit businesses are currently facing cyclical headwinds in more developed regions, we remain optimistic about growth in large and growing markets such as India due to recent winds. or industrial solutions volume growth and pricing drove a solid sales increase and as expected profitability improve sequentially returning to above 18%. A level consistent with our long term target our aerospace and Defense business continues to outperform with sales now at an all time high. The team has worked hard to navigate supply chain bubbles and deliver our technology led products to our customers. Our connectivity strategy remains a priority, and we are in the final stages of launching our new technologies, including next-generation controllers and gateways, which will enhance our offerings across industrial filtration solutions or IFS businesses. Our services business is performing well, and our most recent acquisition, EasyFlow, once again performed above our expectations this quarter and posted a record April. In life sciences, we are now operating with a leaner, more focused cost structure from which we are better positioned to leverage sales growth. Our larger legacy disk drive and food and beverage businesses are performing well, while our newer bioprocessing businesses are working to bring new products to market. Recall that our Isolair bio business in October of 2024 announced the availability of its research grade Isotag AAV reagent. This quarter, we took another important step towards scaling and commercializing this product, announcing the availability of the manufacturing grade product, which is used to address bottlenecks in customers' good manufacturing processes, streamline purification, and bring certain gene therapies to patients in need. Now, some consolidated company highlights. Sales rose 1% year over year, to $940 million, where modest volume growth was offset by a currency translation headwind, allowing pricing to push us forward. Operating margin in the quarter improved 80 basis points over 2024, driven by expense leverage. Adjusted EPS was 99 cents, approximately 8% versus prior year. I want to provide some additional details on tariffs. The impact of tariffs on this quarter's net results was immaterial, and based on what is implemented today, we expect the net impact on our profit to remain immaterial. The reason we have this view is because of how we operate. Structurally, Donaldson is well equipped to successfully navigate the current dynamic global tariff environment. Our operating model provides some natural hedging from tariff impacts. First, about 75% of our footprint is region to support region manufacturing and distribution. Second, our largest exposure is from Mexico to the US, where approximately 85% of goods we ship are USMCA qualified, and our teams are working to accelerate additional qualifications where there are opportunities. Also, in thinking about Donaldson's tariff exposure, it is important to note the U.S. is a net exporter. On an annualized basis, we estimate the total impact of tariff costs on Donaldson today to be around $35 million, which we expect to offset through supply chain and price adjustments, including the application of surcharges. While navigating the ever-changing tariff dynamics, our global operations teams focus on working down backlogs and delivering on customer commitments. Overall, on-time delivery rates remain at high levels. Throughout the quarter, we maintained expense discipline while still investing in strategically important areas. We focused our capital expenditures and R&D investments, which continued across all segments. During the quarter, we also released our fiscal 2024 sustainability report, which illustrates how our environment and social efforts are driving cost savings, strengthening customer relationships, and reinforcing our long-term competitiveness. Key updates include our virtual power purchase agreement, where we teamed with PepsiCo to lower USC emissions. and a 2030 ambition to reduce landfill waste or increase recycling by 3,200 metric tons. These efforts align with the expectations of our global OEM and multinational customers, enhancing our ability to win and expand relationships. Now I'll provide some detail on third quarter sales. In mobile solutions, total sales were $583 million, roughly flat with prior year. Aftermarket sales were $460 million, a 3% increase driven primarily by mid-single-digit growth in our OE channel. Independent channel sales were up low single digits from market share gains. In our first fit businesses, end market pressures continue. Off-road sales were $96 million, down 8%, and on-road sales of $27 million declined 25%, primarily due to ongoing and well-documented weakness in the transportation and agriculture markets. Touching on China for a moment. Mobile solutions China sales were a bright spot in the quarter, increasing 27% from growth in both first fit and aftermarket. We are pleased with the momentum we are seeing, particularly in off-road, as a structural shift to larger, more sophisticated equipment is driving demand for our products. We're optimistic about our long-term growth potential. Turning to industrial solutions, industrial sales rose 5% to $283 million. IFS sales were $232 million, a 1% increase from prior year, with replacement parts sales strength in several key businesses, including power generation, industrial hydraulics, and industrial services, offsetting new equipment declines. Aerospace and defense sales grew to a record $52 million, largely from robust aerospace market demand. In life sciences, sales of $74 million grew 1% compared with prior year. Double-digit sales growth in disk drive and food and beverage replacement parts was partially offset by timing of bioprocessing sales as we had significant project shipments in last year's third quarter. Overall, I'm very pleased with the results we delivered and look forward to a strong fourth quarter. Fiscal 2025 is forecasted to be another record year for Donaldson. Record sales, record operating margin, and record adjusted earnings. Now I'll turn it over to Brad, who will provide more details on the financials.