Donaldson (DCI) Q4 2026 Earnings Call Transcript

Image source: The Motley Fool.

DATE

Wednesday, Aug. 26, 2026 at 10 a.m. ET

CALL PARTICIPANTS

• Senior Director, Investor Relations - Sarika Dhadwal
• President and Chief Executive Officer - Richard Lewis
• Chief Financial Officer - Bradley J. Pogalz

TAKEAWAYS

• Total Sales -- $3.9 billion for fiscal 2026, representing a 5% increase compared with the prior year.
• Q4 Revenue -- $1 billion, the first time the company exceeded this threshold in a single quarter, reflecting an 8% increase over the previous year.
• Adjusted EPS -- $1.15 in the fourth quarter, an increase of 12% driven by operating margin expansion.
• Fiscal 2027 EPS Guidance -- $4.22 to $4.38, including approximately $0.12 of dilution from the Facet acquisition.
• Fiscal 2027 Revenue Guidance -- 5.5% to 9.5% growth, with the midpoint forecasting record sales of more than $4.1 billion.
• Consolidated Operating Margin -- 17.5% in the fourth quarter, a record for the company and an increase of 110 basis points compared with the prior year.
• Mobile Solutions Sales -- $635 million in the fourth quarter, up 8% due to volume growth and pricing benefits.
• Industrial Solutions Sales -- $334 million in the fourth quarter, an 8% increase driven by $30 million in sales from the Facet acquisition.
• Life Sciences Sales -- $90 million in the fourth quarter, representing 10% growth supported by demand for disk drive and food and beverage applications.
• Aftermarket Sales -- $512 million in the fourth quarter, a 9% increase with double-digit growth in the independent channel.
• China Sales -- 27% growth in the fourth quarter, led by a nearly 40% increase in original equipment replacement part sales.
• Aerospace and Defense Sales -- $76 million in the fourth quarter, a 61% increase including Facet, though organic sales declined 3% due to supply chain constraints.
• Industrial Filtration Solutions Sales -- $257 million in the fourth quarter, a 2% decline as lower dust collection equipment volume was partially offset by power generation projects.
• Gross Margin -- 36.7% in the fourth quarter, a record high reflecting favorability from volume, pricing, and product mix.
• Interest Expense Guidance -- $55 million to $60 million for fiscal 2027, compared with $36 million in the prior year, primarily due to Facet-related debt.
• Capital Expenditures -- $70 million to $90 million projected for fiscal 2027, balanced between new technologies and operational efficiency improvements.
• Share Repurchases -- 1% of shares outstanding expected to be purchased in fiscal 2027 to offset stock compensation dilution.
• Net Debt to EBITDA -- 1.4 times, following the repayment of more than $100 million in debt related to the Facet acquisition.
• Footprint Optimization Savings -- $10 million in annualized savings expected once run-rate productivity is achieved in the second half of fiscal 2027.
• Power Generation Margin Pressure -- 40 basis points in the fourth quarter, resulting from operational inefficiencies during a production shift to Mexico.
• Fiscal 2027 Seasonality -- 52% of total sales and 57% of total operating profit are expected in the second half of the year due to historical patterns.

Need a quote from a Motley Fool analyst? Email pr@fool.com

RISKS

• Pogalz stated, "Organic aerospace and defense sales declined 3% as overall supply chain constraints while incrementally improving in some areas persist," noting continued pressure in the segment.
• Pogalz warned that select input cost inflation, largely related to the conflict in the Middle East, and continued operational inefficiencies in power generation impacted gross margins.

SUMMARY

Management reported record fiscal 2026 performance and issued guidance for fiscal 2027 that anticipates continued growth across all three segments despite specific operational headwinds in the industrial business. The company is integrating the Facet acquisition, which is expected to be accretive to gross margin and operating profit dollars in fiscal 2027 despite projected per-share dilution from amortization and interest. Capital allocation priorities include reinvestment in high-margin filtration technologies, consistent dividends, and a restarted share repurchase program. The company is also realigning specific internal businesses to focus on process filtration and microelectronics applications.

• Management announced the merger of the food and beverage and microelectronics businesses into a new unit named Process Filtration effective in the first quarter of fiscal 2027.
• Lewis noted that power generation backlogs are full through fiscal 2027, stating, "we see line of sight to fully loading our capacity through 2028."
• The company attributed Life Sciences growth to the technology shift to Heat-Assisted Magnetic Recording, which increases content per drive for Donaldson.
• Pogalz indicated that the Facet acquisition added 3 percentage points of sales growth in the fourth quarter but was $0.06 dilutive to earnings per share.
• Management stated the plant closure in California and move to Illinois will take the first half of fiscal 2027 to resolve the resulting production backlog in the aerospace segment.

INDUSTRY GLOSSARY

• Aftermarket: Replacement filters and components sold for equipment already in operation.
• Facet: A filtration company acquired by Donaldson on May 4, 2026, focused on aerospace, defense, and power generation.
• First fit: Filtration systems installed by original equipment manufacturers on new machinery or vehicles.
• HAMR: Heat-Assisted Magnetic Recording, a next-generation technology for hard disk drives.
• IFS: Industrial Filtration Solutions, a division focused on dust collection and power generation.

Full Conference Call Transcript

Operator: Hello, everyone. Thank you for joining us, welcome to Donaldson Company Q4 26 Earnings Webcast. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press *1 to raise your hand. To withdraw your question, press *1 again. I will now hand the conference over to Sarika Dhadwal, Senior Director, Investor Relations. Please go ahead.

Sarika Dhadwal: Good morning. Thank you for joining Donaldson's fourth quarter fiscal 26 earnings conference call. With me today are Richard Lewis, president and CEO, and Bradley J. Pogalz, chief financial officer. This morning, we will provide a summary of our fourth quarter performance and our outlook for fiscal 27. During today's call, we will discuss non GAAP or adjusted results. The fourth quarter 26 non GAAP results exclude pretax charges of $8.9 million including $4.2 million of restructuring and other and $4.7 million of business development charges. This compares to prior year pretax charges of $9.5 million of restructuring and other. A reconciliation of GAAP to non GAAP metrics is provided within the schedules attached to this morning's press release.

A quick note on the facet acquisition. We acquired Facet on May 4, 2026. Therefore, beginning with fourth quarter results, we will report on our combined performance. For clarity and to help understand organic performance, Richard and Bradley will add detail on Facet's impact in their remarks where appropriate. 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 Richard.

Richard Lewis: Thanks, Sarika, and good morning, everyone. Fiscal 26 was another record year for Donaldson Company and I am proud of the way our global teams came together. Demonstrating agility and resilience and finishing strong. Led by our collective mission of advancing filtration for a cleaner world, we reached sales of $3.9 billion, an all time high and a 5% increase versus 2025. grew EPS 8% to a record $3.98, expanded operating margin to a record 16% and returned $250 million to shareholders through dividends and share repurchases. Our execution on our clear and balanced growth strategy is yielding higher levels of performance. In mobile, we are building on our strong first fit and aftermarket leadership positions.

Leveraging our large install base gaining share with our OEM partners, and winning new customers. In industrial, we are scaling our platform increasing our aftermarket penetration, expanding in high growth, end markets such as power generation. In life sciences, we are applying our industry leading technologies to grow and gain share in attractive markets focused on high purity filtration. In support of our growth strategy, we completed the largest acquisition in company history, facet filtration, expanding our strategic position in durable end markets, including aerospace and defense, and power generation, and also strengthening our financial profile with facets high growth, high margins, and high percentage of aftermarket sales.

We have made good progress on integration, including tech collaboration to expedite product development, and testing to support growth into newer facet target markets. Our teams have also been working towards achieving targeted synergies. Our progress in 2026, no doubt, drove the company forward. We executed strategically and financially. While demonstrating structural expense discipline and driving operating leverage. Throughout the year, we displayed our commitment to delivering for all our stakeholders. Including our customers, shareholders, and employees. We continually do this through our leadership position in filtration, which was built on decades of solving our customers' most difficult filtration problems. Our best in class technology, uniquely powerful because we focus on filtration capabilities and leverage these technologies across markets.

Our ability to help customers meet evolving environmental and operational goals helping to protect equipment, processes, and people. And our clear and balanced growth strategy as described earlier. This is how we have and continue to win. Now I will review some fourth quarter highlights. Bradley will discuss the quarterly financials and fiscal 27 guidance in more detail. And then I will return for some closing remarks. In the fourth quarter, sales surpassed $1 billion for the first time in company growing 8% above prior year, driven by higher volume, including the facet acquisition and pricing benefits. Operating margin was 17.5%, up 110 basis points over prior year and 90 basis points sequential step up from third quarter.

Due to gross margin expansion, including from improved operational efficiency. Adjusted earnings per share were up 15-12% above 2025. Now I will cover some highlights by segment. In mobile solutions, sales were $635 million, up 8% driven by strong volume growth and pricing. Aftermarket sales were $512 million, up 9% with increases in all regions and in both channels. Grew double digits in our independent channel where we continue to gain share through our product availability reliability, and consistency. We are realizing sales from the major North America fleet win we mentioned last quarter. And we are excited about further strengthening our dealer relationships and creating meaningful pull through opportunities for incremental sales.

On the first fit side, off road sales were $95 million, flat to prior year with strength in construction offsetting muted performance in agriculture. On road sales of $29 million increased 9% as truck production began to ramp, particularly in The US and Europe. I am encouraged by the momentum we are beginning to see in our first fit businesses, in this quarter. Had several meaningful program wins across regions positioning us well for years to come. Another bright spot within mobile has been our business in China. Sales were up 27%, due to a nearly 40% increase in OE replacement part sales.

We are winning new platforms, particularly within the off road, and our growing export market is driving demand, and we are seeing our razor to sell razor blades model at work and driving aftermarket sales strength. In industrial solutions, sales were $334 million, up 8% driven by the inclusion of facet sales, which added $30 million or 10 percentage points of growth. Aerospace and defense sales, which now include facet, were $76 million. A 61% increase versus 2025. Organic aerospace and defense sales declined 3% as overall supply chain constraints while incrementally improving in some areas persist. IFS sales of $257 million declined 2%.

Lower dust collection, new equipment volumes compared against a strong quarter in prior year were partially offset by robust power generation new equipment. New equipment sales from our industrial project based businesses can be lumpy, which is why growing aftermarket penetration remains a key to our strategy. To that end, this quarter, IFS replacement parts sales grew in the low single digits and accounted for 51% of total IFS sales. In life sciences, sales of $90 million increased 10%, largely a result of double digit growth in disk drive, which has been supported by strong market conditions and increasing demand for newer technologies. Solid food and beverage sales also contributed to the increase.

Bart of our success in food and beverage has been driven by our ability to serve and expanding range of high purity applications. Including in food and beverage, health care, pharmaceuticals, and data centers. Through our growth in these markets, we have seen increasingly commonality in the capabilities required to serve them. Including the underlying filtration technologies, including membrane platforms. Engineering, manufacturing, and regulatory. This same foundation extends to our microelectronics business. As such, beginning in the first quarter, we will operate our food and beverage, and microelectronics businesses together under a new name, process filtration. With this focused structure, we aim to drive scalable above market growth. In summary, I am pleased with our fiscal 26 results.

I am particularly impressed by how the Donaldson team closed out the year. We begin fiscal 27 with robust order volumes, healthy backlogs, and focused execution. Our full year guidance, which Bradley will cover in more detail in a minute, reflects our plans to build an even stronger Donaldson for the future and continue our long history of shareholder value creation.

To that end, for fiscal 27, at the midpoint of our guidance ranges, we are forecasting record sales of over $4.1 billion, a 7.5% increase over prior year, driven by growth in several key high margin businesses, operating margin expansion of 90 basis points to point 9% earnings per share of roughly $4.30 including approximately $0.12 of dilution from facet and free cash flow conversion of approximately 95% to 105% which is important as we maintain our commitment to return value to our shareholders. With that, I will now turn it over to Bradley who will provide more details on the fourth quarter financial and our outlook for fiscal 27. Bradley?

Bradley J. Pogalz: Richard. Good morning, everyone. I want to start by recognizing the contributions from the Donaldson team over the past year. We delivered fourth quarter results ahead of expectations. Capping off a year filled with significant macro uncertainty. Including from tariffs and conflict in The Middle East. While also navigating a complicated execution environment particularly in the industrial segment. Throughout the year, our teams had a clear focus on serving our customers, and delivering results. So thank you to all of our employees for your hard work, and for positioning us to build on our success in fiscal 27. I will cover our financial outlook in a few minutes.

But first, I will discuss our record fourth quarter results in more detail. Note that my comments exclude the impact from the nonrecurring charges Sarika referenced earlier. Fourth quarter total sales increased 8% over the prior year. And adjusted EPS of $1.15 grew 12% due to operating margin expansion. I want to quickly touch on the contribution to these metrics from facet which added approximately 3 percentage points of sales growth and diluted our EPS by $0.06 in the quarter. Importantly, Facets business results were in line with forecast, meaning strong sales, gross margin, and operating profit. While amortization and interest were a bit higher than previously expected. Fourth quarter consolidated operating margin was 17.5%, an all time high.

And up 110 basis points from the prior year. The sequential increase from third quarter of 90 basis points is important as it was driven by gross margin expansion. Highlighting delivery on our promise of continued improvement in operating particularly in our industrial business. To that end, gross margin increased 190 basis points to 36.7% an all time company high. Reflecting favorability from volume, pricing, and mix. I also want to call out a couple of offsetting factors. Specifically, select input cost inflation, largely related to the conflict in The Middle East, as well as continued operational inefficiencies in power generation.

Within power generation, demand remains strong, and we are still stabilizing operations at our plant in Mexico following a shift in production. Consequently, we realized about 40 basis points of gross margin pressure in the quarter. I am encouraged by the progress made. Including measurable improvements in throughput delivery performance, and execution. Given the current trajectory, we remain confident that we will fully recover by the middle of fiscal 27.

Important to note is that the impact from footprint optimization was immaterial in the quarter, as we continue to ramp productivity in the receiving facilities and we are still on track to deliver annualized savings of about $10 million once we hit run rate productivity in the second half of fiscal 27. Now back to the p and l. Fourth quarter operating expense as a rate of sales was 19.1%, 80 basis points above the prior year. The higher rate was driven primarily by the addition of facet run rate expenses and amortization. And we also had higher incentive compensation that was partially offset by continued structural expense discipline.

Moving to segment profitability, Mobile solutions pretax margin was a record 21.3%. Above internal expectations and 220 basis points above prior year. Due to volume leverage, pricing, and mix related to aftermarket sales strength. Industrial solutions pretax margin was 16.4%, 450 basis points below prior year. Pressured by the inclusion of facet run rate expenses and amortization, organic expense deleveraging, and headwinds associated with power generation production shifts. On a sequential basis, industrial margin trended higher as expected improving 300 basis points from the third quarter.

We continue to expect margins to return to more normalized levels in the second half of fiscal 27, as a result of sales leverage, margin recovery and power generation, and ramped up production following our plant closures in fiscal 26. Life sciences pretax margin was 11.9%, above internal expectations and up 660 basis points from prior year. Volume leverage from our higher margin food and beverage and Disk Drive businesses, combined with continued expense discipline, drove the notable improvement. In summary, we have strong momentum in our base business. And we will also have the incremental benefit of facet, giving us confidence we can generate another year of record performance in fiscal 27.

With that, I will now go into the details of our outlook. Total sales are expected to grow between 5.5% and 9.5%, driven by increases in all 3 segments. Facet and pricing benefits are each expected to account for approximately 2 percentage points of growth. With currency adding about 1 percentage point and organic volume making up the balance. In mobile solutions, sales are expected to increase between 2-6% resulting from growth in both first fit and aftermarket. Off road sales are projected to increase mid single digits, with favorable conditions in construction while agriculture remains muted. On road sales are forecast to grow high single digits, as global truck production increases.

Aftermarket sales are projected to increase mid single digits. As a result of continued share gains and higher vehicle utilization rates. In industrial solutions, total sales are forecast to grow mid teens with approximately half the growth coming from the inclusion of facet. IFS sales are expected to increase mid single digits with growth across all businesses. Including dust collection and power generation, where we continue to benefit from the super cycle and a robust order book through fiscal 27 and into fiscal 28. Aerospace and defense sales are projected to increase over 50% driven primarily by incremental facet sales.

Organic aerospace and defense sales are forecast to increase mid teens as we work to resolve supply chain issues and deliver on our elevated backlogs. In life sciences, project sales to increase between 7-11% driven by continued customer demand for our process filtration and disk drive solutions. Moving down the p and l, we expect operating margin within a range of 16.6% to 17.2%. The mid point of our range implies a 90 basis points improvement from prior year. Driven by gross margin expansion as we benefit from pricing, facets higher structural gross margin, and improved operational efficiency.

Operating expense as a rate of sales is forecast to partially offset gross margin favorability as a result of the full year impact of facet run rate expenses, as well as amortization of approximately $22 million. While the net impact of facet on our operating margin is expected to be immaterial this year, I do want to note that Facet is accretive in terms of gross margin and operating profit dollars. To help with modeling, I also want to highlight a few things. First, seasonality. We expect our sales and operating profit dollars to generally follow typical seasonality with the second half of the year accounting for the majority of both.

As such, we are forecasting approximately 52% of the total sales and 57% of total operating profit in the second half. The second modeling item to highlight is interest expense. Fiscal 27 interest is expected to be between $55 and $60 million. Compared with $36 million in the prior year. Primarily as a result of interest on facet related debt. While we expect to pay down the facet debt over the course of the year, other factors in our interest expense plan result in a fairly even split across the quarters. All in, our EPS guidance for the full year is between $4.22 and $4.38. Including approximately $0.12 of dilution from facet when considering incremental amortization and additional interest expense.

The midpoint of this range represents another all time high for Donaldson and an 8% increase from prior year. Now on to our balance sheet and cash flow outlook. Our balance sheet is in great shape. We have already paid down over $100 million of facet related debt. Our leverage ratio is currently about 1.4 times net debt to EBITDA. This gives us plenty of financial flexibility to allocate capital for the future. In terms of capital allocation, our priorities are unchanged. First, reinvest back into the company. Our r and d investments in strategically important high growth, high margin areas allow us to maintain and expand our place as a leader in technology led filtration.

And our investments in working capital and capital expenditures ensure we are operating efficiently today and building for tomorrow. With that in mind, capital expenditures are expected to be between $70 million and $90 million. Balanced evenly between investments in new technologies and products across all segments, along with making ongoing investments in maintaining and improving the efficiency of our operational assets. With these investments, we project cash conversion in the range of 95% to 105%. Which marks a level higher than our historical averages largely driven by more targeted capital investments working capital management, and the completion of required annual tax payments stemming from The US Tax Cuts and Jobs Act of 2017.

We Our second capital deployment priority is disciplined M&A. We are actively pursuing opportunities that strengthen our portfolio and meet our strategic and financial criteria. While we invest for profitable growth, we are also returning cash to shareholders. Our third capital allocation priority is dividends. We consistently pay and increase our quarterly dividend. Solidifying our place in the S and P high yield dividend aristocrat index. As of the end of calendar 25, we have paid dividends for 70 years in a row. 280 quarters. And we have increased the dividend for 30 years in a row. that is a statistic we are very proud of. And we look to continue that trend.

Share repurchase is our fourth capital deployment priority and our variable lever. After pausing our repurchasing activity following the Fassett acquisition, we have now restarted our program and expect to purchase about 1% of shares outstanding this year. Which will offset stock compensation dilution. Before I turn it over to Richard, I wanna reiterate how pleased I am with the way we finished fiscal 26. And I look forward to carrying this momentum into fiscal 27. Now I will turn it over. Richard?

Richard Lewis: Thanks, Bradley. Each day, Donaldson Company aims to grow and deliver customer value. Extending our leadership position in technology led filtration. We do this through innovative new solutions in every segment. Including armor seal technology in mobile, Mist Collector in industrial, and products such as our Lifetech high loading performance filter, and hammer related disc drive technology and liquid cooling capabilities in life sciences. With the acquisition of Fassett, we expanded the addressable markets which we can apply our capabilities to and our teams are already seeing cross selling opportunities to capitalize on. We are confident in our ability to grow and grow profitably.

And we are doing so with great discipline, applying a rigorous approach to business portfolio management, ensuring each of our businesses has cleared the high bar to earn a place within Donaldson. I am also proud of how we are growing responsibly are on the path to achieve our 2030 sustainability ambitions, further reducing our greenhouse gas emissions, increasing our renewable energy usage, and advancing product solutions that help reduce environmental impacts. In our most recent sustainability report, we detail some of our latest technology led products. From hydraulic oil saving solutions in mobile to refillable semiconductor filtration systems and next generation battery venting and life sciences. And none of our success would be possible without our talented employees.

And each day, we prioritize employee health and safety. Every Donaldson employee safely home, every day. In closing, as I look ahead, I am excited about the opportunities for Donaldson Company as we continue to build upon our success. Success. I will now turn the call back to the operator to open the line for questions.

Operator: We will now begin the question and answer session. If you would like to ask a question, please press *1 to raise your hand. To withdraw a question, press *1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. The first question comes from the line of Angel Castillo with Morgan Stanley. Please go ahead.

Brian Drab: Hi. Good morning. This is actually Brian Drab sitting in for Angel. Thanks for taking my question. Just starting with margin. Obviously, there is some seasonality here. In 4 q. The margins were a healthy, you know, 17.5%. As we look to, you know, fiscal 27, is there any underlying operational headwinds we should be aware of? Given the midpoint of the guide you know, closer to 17%. Thanks.

Richard Lewis: Yeah. Good morning. Yeah. As we enter f 2027, and Bradley will run you through the numbers in a little bit more detail. This is Richard. From an operational perspective, we will start the year with some continued pressure in our industrial business We have talked about our power gen business and the first half pressure that comes from clearing out our facility in Mexico. So we will see a meaningful step up in that business in the second half. Also, we are finishing the closure of the plants that we had initiated last year. So there will be some volume improvements as the year goes on in that business.

But I would say just in general, there is not a broad operational challenge. it is really a couple acute issues and then our normal seasonality that we will be looking at And then Brett can expound on that further.

Bradley J. Pogalz: Yeah. I think the that normal seasonality is the important part, and we went through that a little bit in my remarks just to try to be clear for everybody. Given that there is a back half profit tilt, about 57% of operating profit landing in the second half. But I would echo Richard's comments. it is really about execution in the industrial business as we go ahead. Otherwise, I think we are looking very positively at margin for the year. The 1 nuance I would say is again, back to our comments, we talked about gross margin expansion with a little bit of operating expense headwind as a function of facets something to keep in mind.

The amortization, just really wanna put a fine point on it. 22 million incremental amortization as a function of that transaction that should be modeled through. And that will that will obviously cascade through the year. And then we get to fourth quarter of fiscal 27 where we compare against a normal quarter with facet. Given that it is, we acquired at the beginning of this last quarter.

Brian Drab: Okay. Perfect. that is, really helpful. Thanks for the color. And then on facet, so there was a it was $0.06 dilutive here in Q4, and yet the fiscal 27 guidance only assumes about $0.12 for the full year. Or, you know, like, below that annualized rate. So, you know, what are the main drivers for this? Is it debt pay down, cost synergies? Purchase accounting step down? Thank you.

Bradley J. Pogalz: Yep. it is it is you have touched on 2 of the big ones. The purchase accounting step down and then pay down. So the amortization in the quarter was in the fourth quarter was more substantial than an annualized rate of $22 million. And that is that is a big part of it, and then some debt pay down. So the thing that I wanna underscore with Facet is on a cash basis. So I am talking business performance, less interest expense. In fiscal 27, facet is accretive. And I think that is an important point to note.

Brian Drab: Great. Thank you. I will send it over.

Operator: Thank you. The next question comes from the line of Robert Mason with Baird. You may go ahead.

Quinn Peterson: Hey. Good morning. Thanks for taking the questions. First 1, Richard, just on the mid teens organic growth guidance in Aerospace and Defense. Can you unpack what gives you confidence the supply chain issues will be resolved to enable that level of growth? And what is the timing we should be thinking about as to when those supply constraints are resolved?

Richard Lewis: Yeah. Good morning, Rob. When we look at the a and d business, our teams have been managing that situation very closely now for several months. And so we feel like we understand the issues intimately. The biggest challenge we have, frankly, going forward is the closure of our California facility that we moved into a facility in Illinois The good news is all of the closure cost associated with that for the most part are behind us, and so now it is really just ramping production in the new site We have teams deployed to support them.

They have got a good handle on the set of issues, and we see sort of I call, operational data every week that shows their improvements. So if you think about it from a timing standpoint, it will take them the first half of the year to sort of chew through that late position. And return this to normalcy When we think about our full year expectations for a and d, that is a big part of what we are expecting. The broader supply chain issues with our supply base those are sort of transient acute issues. We feel like those are mostly under control.

And we have folks managing proactively to monitor for new issues and try to head those off before they become significant headwinds. So all in all, it is a challenge, but we feel really good about our ability to sort of work through that through the fiscal year.

Quinn Peterson: Thanks. And then within mobile, the first fit, both often on road, it seems like the guidance would imply no revenue dollar acceleration from the back half of this last year. Just is that conservatism? Maybe you could discuss your expectations for how an ag recovery might play out as well, that would be helpful.

Richard Lewis: Yeah. So if we keep it to the first fit side in mobile, I will just kinda walk you through all of the end markets. We are seeing pretty broad based strength in mining and construction. And we saw that acceleration Really coming out of the holiday period last fiscal year through Q3 and Q4. That continues into next fiscal year, fiscal year 27. And it is pretty broad based. We see it across all the regions. And we see it really throughout the vast majority of our customer base. The trucking recovery is materializing as expected. We have seen sharp upturns in truck build rates specifically in The US.

Our expectation is that a carry through the rest of the calendar year and likely into the first part of next calendar year. I think there is probably some uncertainty as we get into the second half. Of next calendar year and where this is gonna go, but all signs are pointing to a nice recovery there at least for now. And as you mentioned on ag, what we had been seeing previously was really pretty isolated green shoots. We are starting to see a little bit more broad improvement in that market, albeit at a lower scale than the other markets.

And I would say the range of outcomes across the product segments the customer base is a little bit wider. But it is it we are starting to see green shoots there in ag and hopefully, that will continue to improve throughout the year.

Quinn Peterson: Thank you very much.

Operator: The next question comes from the line of Laurence Alexander with Jefferies. Please go ahead.

Laurence Alexander: Can you give a bit more detail about the underlying trends in the life sciences outlook and how that is setting you up for 2028-2029. I mean, should we think about this as a steady cadence, or are there opportunities to shift your market share position over the next, say, 3-4 years? And then secondly, can you talk on PowerGen? Can you just remind us on the dynamics between first fit and replacement? If there is you know, given the expansion that we are seeing at the OEMs of capacity for gas turbines? Yeah.

Richard Lewis: Good morning. Let's start with your life science question. Broadly, if you think about life sciences, the 2 largest businesses in that segment is our disk drive business and our process filtration business. We are seeing really strong demand outlook on both sides. If you think about the disk drive business, it is really a combination of share and pricing the technology shift to HAMR, which is the next generation technology that has significantly more content per drive for us. And then finally, it is it is really around continued volume growth. So it is really a recipe of all 3 of those. From what we see in our outlook, that has legs beyond fiscal year 27.

We would see this as having a steady growth trajectory for a little while, and we are really optimistic about the technology that we are bringing to that market and our ability to continue to hold and take share The food and bev business process filtration's combination of microelectronics and our historic food and bev it is really a combination of new product releases, and our teams just really executing well commercially. The microelectronics business is seeing some pretty strong tailwinds. Due to the data center AI build out as well as what we are seeing in some of the liquid cooling inside that business.

I would say the base business supporting pharma, food and bev continues to execute really well. So we have a lot of optimism around both of those businesses. And then on the power gen, and Brett can correct my numbers if I am off little bit here, but I think we are talking about 50 percent first fit, 50% aftermarket, roughly the first fit side clearly is going very, very strong. So we are expanding the install base pretty aggressively And we will we will continue to do that for quite some time. And then that is gonna turn into additional aftermarket revenue as those replacement part filters kick in a couple years.

But overall, power gen, we are booked out. For the better part of the fiscal year, and we see line of sight to fully loading our capacity through 2028 Thank you.

Operator: The next question comes from the line of Adam Farley with Stifel. Adam, your line is now open.

Adam Farley: Good morning, everyone. Morning, Adam. Maybe start following up on that Life Sciences question. How should we think about margins in this business? Going forward? Or maybe another way of asking is what should we expect for incremental margins in this business?

Richard Lewis: I think, Adam, if you think about the business and we split it into sort of our new acquisitions and then sort of our traditional business The traditional businesses are sort of leading margins for Donaldson, so think above company average. And ultimately, we would expect this entire business to be significantly above our company average from a margin profile. So over time, we will continue to work the acquisitions, and they all have really clear milestones on both products and commercial penetration. And I would say over the next 18 months, you can think about these products and some of those commercial milestones reaching some pretty significant milestones.

So as those continue to mature, you can think about this business being a higher than company average margin business.

Adam Farley: Okay. And then just shifting gears to IFS. Maybe a little bit more color on the dust collection business within that. How's the first fit piece of the business performing? How have orders trended through the quarter and into August? Are you seeing any increase from customers' willingness to deploy capital? I will leave it there. Thank you.

Richard Lewis: Yeah. Adam, I and I would throw in maybe some of the other nonpower gen IFS businesses. Clearly, dust collection's the largest piece of that, but they are all trending in a pretty similar fashion. What we have seen and since we spoke last time is an acceleration of orders through our fourth quarter And I would say it is not to the same level we are seeing in some of our other end markets, but they are positive trends. And so the first half of last year, that business was Pretty muted on the demand front, and we saw it start to improve in Q3. We have seen an acceleration of that in Q4.

So I would say non data center AI CapEx is improving. But certainly we are not at the peak and but we are encouraged. We are encouraged by the uptick, and a lot of the pressure had been in the US previously. And we are starting to see some of those, you know, quotes that we have been working on turn into order. So good signals going into f 2027. And we will continue to monitor that and be agile. As the year goes on.

Bradley J. Pogalz: Adam, this is Bradley. I will just underscore 1 point. An important part about this business is roughly half goes through recurring revenue, and that is that is been hanging in okay. Not growth to the extent that we have seen in the mobile solutions, but it is important to note that we have got this durable side that supports us when CapEx is a little bit softer, like Richard was saying.

Adam Farley: Thank you thank you for that. Thank you for taking my questions.

Operator: There are no further questions at this time. I will now turn the call back to Richard Lewis for closing remarks.

Richard Lewis: Lewis, I would like to thank all of our Donaldson employees around the world for their relentless commitment, our customers for their trust, and our shareholders for their continued support. Thank you for joining us today. We appreciate your interest in Donaldson and look forward to updating you on our progress next quarter. Thank you.

Operator: This concludes today's call. Thank you for attending. You may now disconnect.

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has positions in and recommends Donaldson. The Motley Fool has a disclosure policy.