Donaldson (DCI) Q3 2025 Earnings Call Transcript

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DATE

Tuesday, June 3, 2025 at 10 a.m. ET

CALL PARTICIPANTS

Chairman, President, and Chief Executive Officer — Todd A. Carpenter

Vice President and Chief Financial Officer — Brad D. Pogalz

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RISKS

Vice President and Chief Financial Officer Brad D. Pogalz stated, "we recorded an impairment of intangible assets in Q3 FY2025 for the upstream bioprocessing businesses, Universal Technologies and Solaris," due to "market headwinds, including weak capital spending, and longer-than-expected drug development timelines, resulting in an elongated ramp-up in sales and profitability ultimately leading to an impairment."

Gross margin declined 110 basis points year over year to 34.5%, primarily due to higher manufacturing costs, particularly from footprint optimization initiatives, which management stated are ongoing and will create continued near-term pressure on gross margin.

TAKEAWAYS

Consolidated Sales: $940 million, a 1% increase, with volume and price growth offsetting currency translation headwinds.

Adjusted EPS: $0.99, up 8% year over year.

Operating Margin: Increased by 80 basis points year over year, driven by expense leverage; full-year forecast at 15.6%-16.0%.

Gross Margin: 34.5%, down 110 basis points year over year, mainly due to higher manufacturing costs from ongoing footprint optimization.

Mobile Solutions Sales: $583 million, flat year over year; aftermarket sales rose 3% to $460 million, with independent channel sales up low single digits and OE channel up mid-single digits; first fit off-road and on-road sales declined 8% and 25%, respectively.

Mobile Solutions China Sales: Increased 27%, driven by growth in both first fit and aftermarket.

Industrial Solutions Sales: $283 million, up 5%; IFS sales $232 million, up 1%, with replacement part strength offsetting new equipment decline; aerospace and defense sales reached a record $52 million.

Life Sciences Sales: $74 million, up 1%; double-digit growth in disk drive and food and beverage, partly offset by lower bioprocessing revenue.

Share Repurchase: 2.4% of outstanding shares repurchased ($192 million); full-year expectation increased to 3.5%-4%.

Dividend: Quarterly dividend increased 11%, marking the 30th consecutive annual increase.

Tariff Impact: Current tariffs estimated at $35 million annually, less than 1% of annualized sales and "immaterial" to profit due to mitigation through supply chain and pricing actions.

Full-Year Outlook: Sales expected to increase 1%-3%; adjusted EPS guidance lifted to $3.64-$3.70, a midpoint increase of $0.03; operating margin guidance unchanged at record levels.

Capital Expenditure: Forecast of $75 million-$90 million, focused on capacity expansion, product development, and technology.

Cash Conversion: Expected in the 80%-90% range, with Q4 conversion anticipated to be higher than year-to-date due to inventory reductions and seasonality.

SUMMARY

Donaldson Company, Inc. (NYSE:DCI) reported record sales and adjusted earnings, supported by recurring aftermarket revenue and disciplined expense management. Management highlighted the appointment of Rich Lewis as Chief Operating Officer, effective August 1, and emphasized ongoing investments in technology and targeted capital expenditures. The company released its fiscal 2024 sustainability report, detailing initiatives such as a virtual power purchase agreement with PepsiCo and a 2030 landfill waste reduction goal. Leadership noted robust visibility in long-cycle project backlogs, especially in power generation and aerospace, and reiterated confidence in tariff mitigation strategies. Strategic capital deployment continued with elevated share buybacks and an 11% dividend increase, alongside targeted investment in growth and efficiency projects.

Vice President and Chief Financial Officer Brad D. Pogalz stated, "operating expense as a rate of sales improved to 18.2% from 20.1% a year ago."

The footprint optimization effort involves U.S. and U.K. plant closures and relocalizations, with most significant transitions expected to complete by year-end and some impact extending into next year.

Aftermarket recurring revenue remains stable, making up 75%-80% of mobile solutions sales, and is expected to underpin performance through cycle shifts.

Connectivity and service revenues are offsetting softness in new equipment sales in Industrial Filtration Solutions, supporting growth in key aftermarket categories.

The impairment charge for bioprocessing assets, mainly Universal Technologies and Solaris, reflected continued "weak capital spending, and longer-than-expected drug development timelines."

INDUSTRY GLOSSARY

IFS (Industrial Filtration Solutions): Donaldson's sub-segment focused on industrial filtration technologies and services, including aftermarket replacement parts, new equipment, and connected solutions.

First Fit: Sales related to original equipment installations, as opposed to aftermarket replacement parts.

Full Conference Call Transcript

Todd Carpenter: 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 is 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 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 net 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 wins. For industrial solutions, volume growth and pricing drove a solid sales increase and as expected, profitability improved 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 $0.99 up 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 US a net exporter. On an annualized basis, we estimate the total impact of tariff cost 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 US 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. I will 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 part 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. Brad?

Brad Pogalz: Thanks, Todd. Good morning, everyone. We're pleased with our third-quarter results. Sales were up due to the strong foundation of recurring revenue and the diverse mix of businesses and geographies where we operate. Profit was up due to revenue growth, expense discipline, and prioritized investments, and we made notable contributions to shareholders via repurchase, and our recently announced dividend increase. I want to thank my colleagues around the world who stay focused on our customers and our opportunities for growth amidst this uncertain environment. It's no easy task, and they do these things while keeping a close eye on expenses profitability, and cash. Which makes us the strong company we are.

Before going through the details on our performance, I want to touch on the charge we took in the quarter for an impairment of intangible assets. The charge relates to our two upstream bioprocessing businesses, Universal Technologies and Solaris. As we have discussed over the last several quarters, results have been pressured by market headwinds, including weak capital spending, and longer-than-expected drug development timelines. The situation has not improved, with an elongated ramp-up in sales and profitability ultimately leading to an impairment. That said, we still believe the bioprocessing market presents great opportunities for us. And we will continue to make strategic investments as we look for ways to develop and commercialize new disruptive technologies.

Now turning to a few highlights from the quarter. Note that my profit comments will exclude the impact from the items Sarika referenced earlier. Total sales increased 1%. Driven by pricing and volume growth, partially offset by a headwind from currency translation. Expense leverage drove operating margin up 80 basis points. And adjusted EPS of $0.99 was 8% above the prior year. Going further into the P and L, we gross margin was 34.5% a decrease of 110 basis points from last year mainly as a result of higher manufacturing costs. Including those related to footprint optimization initiatives. While these projects pressure gross margin in the near term, we are confident they will enhance our long-term profitability.

I also want to repeat a point Todd made about tariffs. The impact on gross margin in the third quarter was negligible. And the total annualized impact from the current tariffs is estimated at less than 1% of sales, which is something we believe we can offset. We recognize the importance of this topic, so we wanted to make it clear where we stand today. Back to the P and L. Third-quarter operating expense as a rate of sales improved to 18.2% from 20.1% a year ago. The favorability was driven by a handful of things. business within life sciences. We had a reversal of an earn-out reserve for our Purologic And we also had lower warranty expense.

These factors were further complemented by our ongoing expense discipline. Reflecting the sharp prioritization happening across the company. In terms of segment profitability, Mobile Solutions pretax profit margin was 18.1%, down 30 basis points year over year, mainly due to higher manufacturing costs. And including those related to footprint optimization projects. Industrial solutions pretax margin was also 18.1%. Down 60 basis points. Largely as a result of unfavorable regional end product sales mix. Life sciences pretax margin improved notably to 7.8% mainly due to the previously mentioned earn-out reversal for PureLogix, which resulted from a longer-than-expected revenue cycle. Life sciences profit margin also benefited from the cost optimization initiatives launched earlier this year.

While we expect market-based headwinds in our bioprocessing business to continue, we are committed to making selective strategic investments while leveraging the strength of our more mature life sciences businesses. Now our updated fiscal 2025 outlook. First on sales. We are projecting a full-year total sales increase between 1% and 3%. In line with our prior guidance. Pricing is expected to contribute approximately 1% and the impacts from both currency translation and tariffs are expected to be negligible. For mobile solutions, where forecasting sales will be flat, to up 2% consistent with our previous expectation as higher margin aftermarket growth, is being partially offset by ongoing first fit pressure.

We did modify the on-road forecast with continued weakness in global truck production resulting in a sales decline in the high teens versus low double digits. As a side note, I know transportation markets get a lot of attention due to the availability of public data. But I want to remind everyone that the on-road first fit part of our business hovers between only 3% and 5% of total sales. We like this space, and our deep customer relationships give us confidence that our advanced technologies are excellent solutions now and into the future, but it's important to keep perspective on the impact these truck cycles have on our business.

Moving to off-road, the sales guidance of a mid-single-digit decline stayed the same. Primarily due to weak agriculture markets. Our guidance for aftermarket sales is also unchanged. At a low single-digit increase versus the prior year. Showing the resilience of this important category of business. In industrial solutions, sales are forecast to grow between 2% and 4%. In line with our previous expectation. We continue to expect IFS sales to increase low single digits with replacement part growth offsetting slower sales of new equipment. Which are being pressured by the uncertain economic environment.

Aerospace and defense sales are now projected to increase in the low teens up from high single digits as robust market conditions in both aerospace and defense continue. In life sciences, our expectation of high single-digit growth is unchanged. The positive momentum in our larger legacy businesses, disc drive and food and beverage, continues to be partially offset by ongoing weakness in bioprocessing. Consistent with the guidance we laid out at the beginning of the year, we are forecasting full-year segment profitability to be roughly breakeven. From a total company perspective, we are maintaining our forecast operating margin at record levels, between 15.6% and 16.0%. At the midpoint, this would be a 40 basis point year-over-year expansion.

Largely as a result of our continued focus on expense management. Our adjusted EPS guidance of $3.64 to $3.70 also reflects a record level. At the midpoint, we raised our forecast $0.03 from our previous guidance. Implying a solid 7% year-over-year EPS increase that is built on a 2% sales increase. Despite the economic environment, we demonstrate our ability to drive leverage conditions become more robust. and we believe we could further expand that leverage when the economic In the meantime, we control what we can. Including those key aspects of capital deployment. Ash conversion is expected to be in the range of 80% to 90% this year. Consistent with historical averages.

We look to finish the year with fourth-quarter conversion higher than year-to-date levels due to normal seasonality and a reduction in working capital. Primarily through lower inventory levels as our teams continue to navigate certain supply chain issues. And then at a high level, strategic capital deployment is always on our minds. Investing for growth remains the top priority. We see opportunities within the company and outside via acquisitions. Inside the company, our capital expenditures for this year are forecast between $75 million and $90 million We are investing in future growth through capacity expansion, new product development, and technology projects. M and A is also an important lever in supporting our future growth.

And we are still actively working a pipeline of opportunities. We are strategic and disciplined. With our focus remaining more squarely on opportunities within the life sciences and industrial markets. But the timing of deals can be uncertain. And that guides our actions. We have to protect some level of liquidity to give us flexibility to act when the opportunity arises. And we do this well given the incredible strength of our balance sheet. At the same time, we're committed to the ongoing return of cash to shareholders in a thoughtful and systematic manner. I want to provide a couple of updates on that point.

First, as Todd mentioned, last week, we announced an 11% increase in our quarterly cash dividend. This level of increase is a testament to our strong operating performance today and our confidence in our future performance and financial strength. It's also worth highlighting that 2025 is forecast to be Donaldson's 30th year in a row. Of annual dividend increases. It's a massive accomplishment. And limited to a small number of great companies. Including our peers in the S and P high yield dividend aristocrat index. We are proud to be part of this elite group.

My second point on returning cash to shareholders during the third quarter, we repurchased 2.4% of our outstanding shares for a total of $192 million bringing our year-to-date repurchase to 3.3% of outstanding shares. With that level of buyback, we are now increasing our full-year expectation to between 3.5% and 4%. Dividends and share repurchase are longstanding components of our capital deployment priorities. And through these vehicles, we demonstrate our view that Donaldson has a strong foundation and excellent long-term growth prospects.

In summary, we performed well so far this year, The outlook we provided today suggests that performance continues in fourth quarter, in fiscal 2025. keeping us on track to deliver record sales and adjusted earnings Now I'll turn the call back to Todd.

Todd Carpenter: Thanks, Brad. Looking ahead, as I said in my opening comments, Donaldson is playing from a position of strength and I'm confident that we are well positioned to deliver long-term value through strategic investments strong execution, and disciplined capital deployment. Our team's ability to navigate dynamic market conditions while advancing innovation and growth initiatives gives me optimism as we drive forward to a robust future. With that, I'll now turn the call back to the operator to open the line for questions.

Operator: Thank you. If you would like to ask a question, please press

Angel Castillo: star followed by the number one on your telephone keypad. Our first question comes from Angel Castillo from Morgan Stanley. Please go ahead. Your line is open. Good morning, and thanks for taking my question. Congrats on the strong quarter. Just wanted to maybe unpack a little bit more If we could talk about kind of the gross profit margin dynamic, particularly, I think there was a little bit of a step down here, I guess, in sequentially year over year, and you talked about some of the pieces.

Can you as you look forward, could you talk about kind of the ability to remain price cost neutral and how you're seeing inflation more broadly in your business and perhaps also kind of quantify maybe how much was just due to footprint optimization initiatives and therefore, might not repeat as we go forward? Hello? Hello?

Brad Pogalz: Angel, can you hear me?

Angel Castillo: Yeah. We can I can hear you now?

Brad Pogalz: Okay. Sorry about that. We've got some technical difficulties. Apologies to the group. So this is Brad. I wanna start with the footprint. That was the majority of the decline in gross margin in the quarter. And I wanna touch on that really quickly. I'll come back to your other comments about price cost. But as far as the footprint specifically, we're we're at a point of heavy lift

Angel Castillo: can

Brad Pogalz: kicked off last year. So one plant the US is closing and going to another US state. We've got a plant in the UK that's closing, and it's going to East Europe. So this is about driving towards longer-term opportunities and that's where the activities are happening right now. As far as price cost, we feel very good about our biz our position to stay neutral on that. We continue to get price. Obviously, the mission for us is to be fair with our customers. We're a premium brand in the markets, and there's a lot of different pricing strategies, but overall, there's no change to our stance here.

We will continue to make sure that we hold on to pricing where we can.

Angel Castillo: That's very helpful. And maybe if we could just expand a little bit more on the on the footprint side. As it relates to CapEx, you lowered the CapEx outlook for the year. Can you talk about maybe what's kind of driving that? And as you think strategically kind of longer term and given some of the administration's kind of proposed tax policies, any shift or potential kind of impact or benefits to your strategy, capital investments as we think kinda going forward or desired and perhaps, you know, in size or timing of or location of your investment?

Todd Carpenter: Sure, Angel. This is Todd. So we launched CapEx projects when we feel comfortable that we can execute them. Given the dynamic environment of the tariffs, such situation and, clearly, supply chain pressures and disruption we have large teams of people dealing with that on a on a more priority basis than launching some of the capex We're also really holding more inventory than we had originally planned this year as a direct result to that so we can offset supply chain. Remember, our strategy is to always put our customers first. So while we had initially thought that we would be driving inventory down faster than we are, and launching capex projects.

Right now, it's it's really prudent to focus on executing the businesses for our custom and that's what you're saying.

Angel Castillo: Very helpful. Thank you. Our next question comes from Brian Blair from Oppenheimer. Please go ahead. Your line is open.

Todd Carpenter: Next morning, everyone. Morning.

Brian Blair: I was hoping you

Brad Pogalz: offer a little more color on industrial solutions, top line trends. Obviously, the you know, segment revenue guide was maintained. So, you know, moving parts net, I guess, I guess, to the same level you talked last quarter about the project driven side of IFS being I guess, somewhat bifurcated. You know, auto e d being notably weak having strength elsewhere. Is that still the case? Is your team seeing any shift in that dynamic? And then on the connected service revenue, that's, of course, been a good guy for the segment. I think you had called out around 30% year to date connected machine growth last quarter. Are you still seeing a similar level of momentum there?

Todd Carpenter: Sure. So at the macro, Brad will get couple of numbers here or Sarka. But at the macro, this is what's taking place. Within our, industrial solutions businesses, the equipment side of the business is a bit more pressured. We'd still see a large number of quotes coming through. It's just a little bit slower to turn those into projects, but there is healthy activity out there, just a little bit more careful. Therefore, what you're seeing from our company is more of an aftermarket story. It's also we've been growing share nicely in our what we call stationary hydraulics business.

And you know, put those two together, hydraulics, aftermarket, and then now the newer portion of services together, they can really offset any of the other headwinds. I would note also that in the quarter that power generation you know, that's a very lumpy business for us. That was a bit more muted comparably year over year. And so as we look forward in the year, we have more projects that will be shipping. And that really helps us to sustain the overall forecast within Industrial Solutions.

Brad Pogalz: Brian, this is Brad. I just wanna add one point. Todd talked about the recurring revenue for mobile solutions in his prepared remarks, but I just wanna say to the to the question about our results, a little over half of the IFS business is replacement parts. So this is, again, something that gives us quite a good foundation, especially as there's a little bit of a softening on the capex.

Brian Blair: Yeah. Appreciate that color. And I'm sorry if I missed the detail. What was the margin impacts of reversing the Purologix earn out reserves. And then given you know, the you know, prolonged path to, final process and commercialization, are the fiscal 2026 targets for life sciences still in play?

Brad Pogalz: The total Purologix specific was about $6 million in the quarter, and that's exactly what you said. It's an elongation of the revenue cycle in this business. Similar to what we talked about with the other upstream businesses. As far as fiscal 2026 targets, we're we're going through the process of building our plans right now, and that's something where we'll we'll come back to the group with something in fourth quarter like we typically do. Yeah. I do wanna point out

Todd Carpenter: though that, Brian, as we continue to work on life sciences as this year evolved, our profitability within the life sciences business has sequentially improved each quarter of the year.

Brian Blair: Understood. You, Ken.

Operator: Our next question comes from Brian Drab from William Blair. Please go ahead. Your line is open.

Tyler Mulier: Hey. Good morning. This is Tyler on for Brian. Thanks for taking my questions.

Todd Carpenter: First, aftermarket business continues to report growth Just wondering how well trend is expected to hold up in the next fiscal year looking for guidance, but the full year guidance right now implies a somewhat deceleration in the fourth quarter. But maybe this is driven by a strong fourth quarter in the prior year. I'm just wondering how does the growth rate trend against the recent strong performance in the next few quarters. Yeah. So if you just take a look at our company,

Todd Carpenter: and split it into two halves, the fiscal year, First half is about 48% of our revenue in the second half. Is 52. It is at our mobile solutions aftermarket certainly falls within that cyclicality. Typically, our third and fourth quarters are the strongest of the year. And so that's the reason why you see a strong performance in the third quarter We just have good vehicle utilization and very importantly, our teams are doing an excellent job at share gains. Within that, giving us confidence that you'll continue to see that in the fourth quarter as well.

Tyler Mulier: Great. And then and aerospace and defense, things be strong as well. What is your visibility like in this segment? Do the comps get tough? In fiscal 2026? Or do you have enough project activity in the pipeline to maintain the current pace? Thanks. Sorry. I'm not getting anything back.

Todd Carpenter: Can you hear me now?

Tyler Mulier: Yeah. Can you hear me now?

Tyler Mulier: Okay. Great. Yep. So when you look at the visibility of aerospace

Todd Carpenter: and defense, we do have long visibility as much as four and five and six quarters on some of the projects. They go multi years projects. And so we do have good visibility. The difficulty in that business right now is the uncertainty of supply chain. And so we have fits and starts within the supply chain activities making that a little bit more difficult to predict the lumpiness of it at this point in time. As well as they have had some swirling conversations of will there be some project cancellations, etcetera. But, you know, project cancellations, conversations, are one thing to be had in the in the newspapers. It's it's another to understand whether they're really getting canceled.

Or not, and we continue to execute all of those. So there's there's some macro environmental things that are making that a little bit more difficult to predict, but you know, you roll it all together in a way team is executing. Our business is really strong, doing an excellent job, taking care of our customers, and as we said, we just shipped a record quarter in our aerospace and the vet's business.

Tyler Mulier: Okay. Thank you. I'll pass it along.

Operator: Our next question comes from Laurence Alexander from Jefferies. Please go ahead. Your line is open.

Dan Rizzo: Hi. This is Dan Rizzoone for Laurence. Just to follow-up on that. So you

Dan Rizzo: indicated you had a record in a and d. So was there some pull forward there? Because, I mean, just based upon and you kind of talked about this a little bit. Based upon the key the overall two 2025 guidance. It seems like there is a somewhat of a slowdown in the fourth quarter here. Year over year. We did have some

Todd Carpenter: second quarter sales that flopped into the third quarter. And so rather than a pull head, it was a little bit of a of a push out, if you will. We now we're able to get those projects shipped and out but that's the supply chain disruptions that I've I've been referencing here. And we've baked all of that into the guide into the fourth quarter, and that's how it rolls up. So remember, we did

Dan Rizzo: have

Todd Carpenter: our aerospace and defense guide go from high single digits last quarter to now be low teens, so it has increased.

Brad Pogalz: Yeah. One thing I'll add, Dan. This is Brad. Just keep in mind, please, that last year sales in aerospace and defense were up more than 20%. In the fourth quarter. So if you just try to smooth that with a two year, the first half and the second half of this year are looking more comparable than what the math would suggest with the specific quarterly growth rate for fourth quarter this year.

Dan Rizzo: Okay. No. That's helpful. And then I guess the same thing kinda with aftermarket then. Because the fourth quarter, I mean, it's still a fairly strong year, but it looks like, again, and this was alluded to before, there's a bit of a, I think, a downturn year over year in the middle of on your guidance in the fourth quarter, but I guess that would just be attributed to a to a pretty tough comp.

Dan Rizzo: Right? Right.

Todd Carpenter: Right. Exactly.

Dan Rizzo: Okay. And then final question, So with FX, is there a rule of thumb that we should use like, make changes in the euro or other changes in the I don't know, the peso or something like that of how it works with know, with the fluctuations that we've seen over the past few months?

Brad Pogalz: Yeah. It's hard because of the basket of currencies. So the euro is the most commonly traded outside of the USD. And that's in the neighborhood of 20%. The next closest current currencies are some Asian ones that are low single digits. So you can see that outsized movements in places like South Africa or Brazil create a lot of volatility within the total numbers. So it's hard to give you a heuristic on x percent equals y percent, but, hopefully, that helps some

Dan Rizzo: Alright. It does. Alright. Thanks a lot, guys. I'll turn it

Operator: Our next question comes from Rob Mason from Baird. Please go ahead. Your line is open.

Rob Mason: Yes. Thanks for taking the question, and congrats to Rich.

Rob Mason: Wanted to circle back just on the industrial business and industrial segment, maybe I have hone in on IFS in particular, you know, your guidance for the year kind of implies the fourth quarter would be up sequentially. Todd, you talked about on the power gen side. That being more project driven. Similarly, the new equipment, I guess, in IFS quoting activities down. So is the step up that we're seeing in the fourth quarter, is that solely due to PowerGen? That's the way and maybe aftermarket growth. Is that to think about that?

Todd Carpenter: Three things. One, aftermarket growth. So industrial production continues. We continue to win share due to our connected based strategies. We also have a service based revenue that's been growing quite nicely. So that connected strategy really is helping to drive our aftermarket growth. So that's the first story. The second is we've done really well on industrial hydraulics or what we call stationary hydraulics. And we have grown that piece. And then the third piece will be the power generation that you referenced.

Rob Mason: Okay. And just because that is longer cycle,

Rob Mason: power gen, is that do you have visibility that ex that stretches out over multiple quarters there, or is that I'm just curious if the your commentary around lower quoting activity you know, applies to that business also. We do. We have a very long

Todd Carpenter: visibility on power generation. Some of the longest in the company. And I can tell you the power generation projects are really being sought after to lock up capacity, from us all the way out as far as fiscal year 2028. So that's the kind of conversations that we're having with our customers. At this point. Power generation is clearly in a growth cycle. It's in already been for the last two years in a growth cycle. It's really an extended one as you read about in the news

Rob Mason: Yep. Okay. And then maybe I may have missed this, Brad, when you were commenting around the footprint optimization, but when would you expect those moves to be complete in terms of just having an, I guess, a negative impact on gross margin. If I can layer on another one real quick, just how should we be thinking about the timing of these tariff flow throughs as well as your mitigation efforts? I know it was negligible in the third quarter, but just over the next few quarters cadence. Sure. Both important questions.

Brad Pogalz: Footprint, a lot of the heavy lifting is gonna be done towards the end of this calendar year. There will be some trickle through into next year as we complete the moves. So that's that's something that we'd expect to happen again in the coming quarters. Tariffs, the flow through, you can think about this give or take, 1% of sales think $35 million or so. It's almost ratable at this point based on flow of goods. Now, of course, that's the estimate today, and things are things are constantly changing.

But from our seat, and Todd touched on this, the region to support region footprint gives us a great advantage here, and then further the USMCA quality really help us. So we do believe this is something that we can handily off as a function of pricing or moving supply chain.

Rob Mason: Very good. Thank you.

Operator: Our next question comes from Tim Stein from Raymond James.

Timothy Thein: Thank you. Good morning. I maybe I'll just

Timothy Thein: package these together. The first question is on

Timothy Thein: the maybe just some preliminary thoughts as we're looking at 26. I know, Todd, you're

Timothy Thein: you're putting together the plans, but maybe just anything you could offer in terms of

Timothy Thein: I don't know, maybe markets or geographies that you're

Timothy Thein: maybe more optimistic about

Timothy Thein: just maybe just, again, a high level of thought to the extent you're you're you can share that. And then part two is just on

Timothy Thein: the mobile aftermarket as you as you look across the both the o e and independent channels. Were is any comments just in terms of

Timothy Thein: general inventory levels

Timothy Thein: and where the channel sits from a kind of from a stocking perspective. And Sure. Let me that's it for me. Thank you.

Todd Carpenter: You. Yeah. Let me take the inventory question first. So

Todd Carpenter: I'll tell you, in the mobile aftermarket, we grew in both the o e and the independent channels within this quarter. Low single digits low to mid single digits in both of those, and as a reminder, our independent channel is 55% of our mobile aftermarket, and the o e is 45. Relative to inventories out there, they feel like they're at pull through levels It's very comfortable conversations with both channels, and so that all feels like will experience a normal cyclicality that we would expect in the fourth quarter. As far as fiscal 2026, you know, obviously, we're gonna be smarter in 90 more days given the dynamic environment.

But maybe what I'll I'll I'll say is I find it pretty interesting I hope you find it very interesting that our company just had a record quarter yet again. While our o e end markets have headwinds, and declining somewhat in the on road and the agriculture sectors, and yet we still continue to perform very well. We are poised when the overall economic cycle ticks up to really leverage that, and our company is in a solid position and executing exceptionally well as we look to 26 in our plans.

We'll continue to have that in our sites, and that's the type of plan that we'll we'll put together for you, and we'll talk about here in about 90 days.

Timothy Thein: Alrighty. Thank you.

Operator: Our last question comes from Nathan Jones from Stifel. Please go ahead. Your line is open.

Adam Farley: Yeah. Thank you. Good morning. This is Adam Farley on for Nathan.

Adam Farley: I wanted to follow-up on the tariff discussion. I realized that it's relatively immaterial on the cost side, but do you have any expectations from lower global growth due to disruption or uncertainty from tariffs Maybe just any view on potential demand disruption from tariffs?

Todd Carpenter: Tough to say. You know, we continue to react to it, talk to all our customers. Make sure we take care of our customers. It's just it's just tough to say. I think I think if you take surveys out there, you get a varying degree of opinions. For us right now, you know, clearly, the first fit projects, both in the industrial and mobile, are clearly more careful. But if you say vehicle utilization, our aftermarket pace businesses, our service based businesses, those kind of activities, they continue to march along pretty well.

Adam Farley: So

Todd Carpenter: it's really tough to say as far as will there be a pullback what lies ahead We're managing carefully just like everyone else. And, you know, doing a very good job at that.

Adam Farley: Alright. I'll leave it there. Thank you for taking my question.

Operator: Have no further questions. I'd like to turn the call back over to Todd Carpenter for closing remarks.

Todd Carpenter: That concludes the call today. Thanks to everyone who participated. We look forward to reporting our fourth quarter and full year fiscal 2025 results. In August. Have a great day. Goodbye.

Operator: This concludes today's call. You may now disconnect.

Operator: And we're now in private. Have a great day, everyone.

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