Donaldson Company, Inc. Aktie

I'll just give a quick introduction. I'm Brian Drab, the industrial technology analyst at William Blair, and I've been covering Donaldson since 2008. Very happy to have the whole team with us today. We've got Rich Lewis, CEO; CFO, Brad Pogalz; and Head of Investor Relations, Sarika Dhadwal.

I do have to remind you, you can find a full list of research disclosures on our website, williamblair.com. This is kind of exciting for me. We've got Rich Lewis for the first time at our conference and very excited to have you. Donaldson has a track record of having some of my favorite CEOs. Bill Cook was such a nice person in addition to being a great CEO.

I remember he sent me a message on the day that my twins were born in 2012 saying the importance of, like, how special it is to have daughters and talking about his daughters. And actually, in that year, in June, I had to -- I introduced Phil and then ran off the stage to go to the hospital because my wife, like, I go, "My wife is trying not to have our twins right now." And I ran off and they came like a month later, but it was like touch and go.

So memories, anyway, I've been doing this for a long time. But I'm going to get out of the way. I have things to say about the company, but I've taken too much time already. I'm going to let you say everything about the company. Thank you for being here, Rich.

Yes. Thanks for having us. All right. We're on here. So again, Rich Lewis, President and CEO of Donaldson. Thanks for joining us here today, and welcome to the Donaldson presentation. So we'll do our safe harbor statement. I know everybody has seen this before. Everything will be as of our Q3 earnings release, which just happened to be this past Tuesday. So everything is very fresh with related to the company's numbers.

I'll talk a lot about the company today, but I really want to use this slide to sort of set up what I would consider the key takeaways. So we are a filtration company. We focus on filtration. That's where our heart's at. That's where our DNA is at. We're a pure-play filtration company. And we've been solving some of the most difficult, challenging problems in this industry for over a century.

What that's done for us is it's built really deep application expertise across multiple end markets and multiple product lines. We've also built durable customer relations over that period of time by working back and forth with our customers to understand their challenges, solving those problems, and that creates a very strong moat for us in these industries.

We lead with technology. We've been setting the bar for innovation and technology and filtration. And I'll just tell you, I remember when I interviewed with the company, I was not a filter guy came from other industries back in 2002, and I went to our Bloomington, Minnesota headquarters, and I was amazed at the depth of technology.

As a kid who would just change his oil filter on his cars when he was young to understand what goes into some of these filters was a different level of expertise than I had ever imagined. So we lead with technology. But more importantly, we use it to set the performance bar with us and our customers, but also for the industry.

And you can see across all of our product lines, we've done that over generation and generation. So why is that important? So that's what we do and how we do it. And let me tell you about why it's important. Why it's important is if you look at what our -- where we play, we play in industries where filtration and our customers' applications are either mission-critical or they're very high value creation industries.

If you think about the cost of a filter versus the total operating cost from our customers, it's a small price to pay to have the best technology. We provide them with 2 things. First, peace of mind. We are protecting their most valuable assets. We're protecting their people, their manufacturing processes and their products.

We also enable greater levels of productivity. They will make more money using a Donaldson system than they can with the alternative through greater levels of uptime, greater levels of reliability, better efficiency. So greater peace of mind, greater productivity in a relatively low-cost product relative to their total operating cost.

If you think about how we grow, so we operate in multiple end markets through multiple products and multiple applications. All of those have macro tailwinds to one degree or another. And then we layer in market share gains based on operational excellence and our innovative filtration technology and then pricing. That's our growth algorithm, and we deploy that across multiple end markets.

We've been doing mobile solutions, so our large off-highway, on-highway business for well over a century. We continue to harvest the investments we've made over decades to continue to grow market share in those markets and those markets continue to grow.

We use our strong razor to razor cell razor blade model. So we are very much consumable-driven, resilient, high-margin replacement part business, and we use the proceeds of that to expand our technology footprint. One area in particular is we've been expanding into high-purity membrane filtration.

What that does for us is it gives us access to a much wider addressable market. This is the model we've been deploying and it's the model we'll continue to deploy, and this is how we win. So I won't drain this slide, but this is a good takeaway if you want to look back later and see who Donaldson is.

We're a 111-year-old firm, again, purely focused on filtration. As a technology-led filtration company, we have over 3,000 patents. We deploy those across 3 operating segments: our Mobile Solutions, which is our longest tenured business, our Industrial Solutions and then Life Science, which is our high-purity filtration markets.

66% of our revenue comes from high-margin, durable replacement consumables. This is our business. We'll talk more about some of the specifics as I go through here. We're a global company. We operate with a global footprint, but we have a local touch. So if you go to all of our core end markets, we have deep application teams, sales team, customer service teams supporting those customers regionally, but it's underpinned by global scale and operational capabilities and R&D.

So if you think about our technology investments, most of our technologies are deployed through multiple end markets and certainly in multiple regions. Operational capability is the same. You can go into a plant in China and see filters being made on the same production assets for mining, dust collection and power gen, and you could see the same thing on a plant in Europe or the U.S.

We have global scale, but we deploy it with a local touch, which allows us to be very sensitive to local market needs. Our objective financially is very simple. We want to deliver higher levels of profitability on a growing top line. F '26, which will end at the end of July, will be no different.

We'll set record levels of sales, adjusted operating profit and EPS for this fiscal year. We continue to grow the company, but we also are investing for the long haul. So these will be records across all 3 KPIs, and we continue to invest aggressively for long-term growth.

Our top line this year will come in around 4% on the sales line, and our EPS will be roughly 8% growth over prior year. I want to talk a little bit about the sequencing because this has been part of the conversation as this year has progressed. We exited our fiscal year '25 with a lot of momentum. Our first quarter was very much in line with expectations and what we thought would happen based on how we exited '25.

Our quarter 2, which frankly, is always a little bit analytically tough just because it covers November, December holiday period, sometimes it also covers the spring Chinese New Year type holidays as well. So we always have a little bit of noise from that. But on top of that, we had a very aggressive, I would say, a lot of our large OEM customers were managing their balance sheet towards the end of the calendar year.

And then we had some deleveraging due to that, and we also had some operational challenges. We're in the midst of closing 4 plants and then ramping up one of our facilities in Mexico to support the ongoing tailwinds in the power gen business. And there was a fair bit of cost and operational challenges in the quarter related to those things.

Transient in nature, but they had a meaningful impact in the quarter. So as we exited the commentary that we had out of our earnings call was, "Hey, look, there'll be a sequential step-up in Q3 as some of those costs abate and we see some of the volumes come back." Happy to say we saw a large uptick in our backlogs coming out of Q2 and sequentially increasing through our Q3.

We'll exit Q3 with record levels of backlog and we saw the sequential step-up that we had expected and anticipated. Quarter 3 was a record quarter for us on sales, adjusted operating profit and EPS, a record of all time regardless of quarter. So we had a really strong Q3, and we still carry probably over a point of gross margin and operating margin pressure due to those transient challenges that we have that we'll work through over the next couple of quarters.

So we expect our Industrial business to continue to expand margins as we exit this year into next year. For our guide, you can see we're expecting another step-up in Q4. That will be the first step in the recovery of some of those challenges, and we'll finish the year at record levels across all 3 of our major KPIs.

So let's talk about our competitive advantages. I mentioned several of these in the opener. It's really a layered approach. We don't rely on one particular thing to give us a competitive advantage. It's several moats of strategic advantage, long-standing innovation. We have the widest technology base in the industry.

We have deep application knowledge into all of our key applications and product lines, and we have a global footprint that's frankly unparalleled in this industry. That gives us scale and cost, along with the best technology with a very, very deep expertise in our end markets. This is a big part of our competitive advantage.

And then when you layer in the model, which is razor to sell razor blades, it creates a very durable, resilient business. We use that to continue to expand our technology base into high-purity filtration, which is the next generation of our long-term growth would be in our Life Science business.

So if you look across all 3 segments, they all have meaningful roles to play in our growth portfolio. Mobile Solutions being our core market and our most mature has been -- continued to grow through the cycle. We have two end markets that have been depressed and this business continues to grow. It's a testament to the model, the share gain and the resiliency of the replacement parts.

Industrial, we continue to drive scale and synergy across this business while increasing customer intimacy. We see industrial as an opportunity for us to expand this portfolio significantly over the next decade. And then finally, Life Science, we talked about expanding our technology base, which opens up a large new addressable market.

If you think about Life Sciences, the 2 largest businesses within that are legacy Donaldson businesses, our food and beverage business and our disk drive business. Both have very strong tailwinds from a market standpoint today, and both businesses are continuing to grow market share very aggressively.

All 3 businesses, top line and bottom line growth opportunities with strong underpinning from the macro. Let's talk capital deployment. So we just completed the largest acquisition in the company's history. I'll talk about that here in a second. Our capital deployment philosophy remains the same. We are now 30 years of increasing dividends. We're a proud member of the S&P Dividend Aristocrat Fund.

We will continue to be great generators of cash. Our first priority is organic investment. Part of those durable advantages is a long-standing repetitive, high level of return on invested capital. That is a good sign of our durable competitive advantages, but it's also how we manage our capital base.

Organic investment, we'll continue to look for M&A opportunities. That asset was a great addition to our business, but we'll continue to be disciplined and very strategic about where we go into M&A.

And then dividends, and share buybacks will continue to be part of our balanced structure.

I'm sure there'll be a question about that here in a little while, so we'll just address that in the Q&A. Facet. Let's talk about Facet. So Facet is a great business, very high margin profile, fast-growing business relative to a typical industrial business and very, very sticky customer relationships.

From the refinery to the wing in jet fuel, sometimes these filters are used 7x to filter those fluids. It's also highly regulated due to the safety nature. So this is a great business, very sticky customer relationships. They've been at this for 85 years. Frankly, they are another Donaldson, both culturally and how they think about filters.

They are a great company, and we're really excited to have them as part of our portfolio. So -- let's talk about Donaldson and what we do. We are filtration experts. A lot of times, we'll say we're filter geeks because we really like filters, and we're really into the science, all the way from the fibers and the raw materials to the construction of the filters to the applications.

Why that's important? We provide our customers the best-in-class technology that gives them peace of mind for value-creating mission-critical applications, and we increase their productivity, all for a low portion of their overall operating cost. We'll continue to grow all 3 segments. They all have macro tailwinds, market share opportunities, pricing opportunities.

And then we'll continue to extend our technology base that opens up all the high-purity filter applications and gives us a large portion of new growth opportunities for the long haul. It's a great company and the growth algorithm, I think, has been very consistent. Our return on invested capital has been very consistent.

And personally, I moved to Minnesota for Donaldson, not because I like cold weather, and I've been really happy with the company over my career. So I'm proud to be the new CEO of the company, and I look forward to continuing to protect what makes us special.

All right. Thanks a lot, Rich. I don't have microphone, so do you mind taking this, then I'll use this one. Thank you very much. We have 12 minutes in this room, and sorry about the confusion about the breakout room. I know on your schedule, it says something. I'm being told by the organizers. We are going to the Richardson room after we conclude some Q&A here.

So I'll ask the first question, then we can open it up to anyone in the audience that has a question. Rich and I first met at the Investor Day for Donaldson several years ago. And at the time, I didn't know that he was going to become CEO, but I left the conversation very impressed and actually had a conversation with Tod Carpenter, the CEO at the time saying, "Man, this guy is really intense and really passionate about the company."

Nice. And I'm intense. Is that the conclusion?

So far. That's if I have to sum it -- if you're asking me to sum it up in one word. I like intensity. You can ask my boss is sitting in the back, he'll attest to that. No. So what I -- one of the main takeaways I had after talking to Rich, though, was that there was a major change at this company that had taken place really during the pandemic, I think, around that time in terms of pricing and the culture around pricing. And I wonder if you could just talk about that a little bit.

Sure. Yes. I mean we were specifically talking about the largest part of our company, which is our Mobile OEM business. So if you think about our Mobile business being 2/3 out of that, the largest portion is our Mobile OE business. A lot of long-standing relationships. And we came off a period of time, frankly, I mean, I was our global operations leader for multiple years.

So I ran all of our plants and distribution centers, procurement around the world through a fairly deflationary period of time on the back of a China super cycle that went on quite some time. So we were moving footprint to low-cost countries, spending capital on automation, driving lean manufacturing.

And we were able to continue to reduce costs and pass that cost along to our customers and also take some for ourselves. But there was an inflection point in the mid-20 teens where inflation and deflation equation had changed. But the relationships with the customers had not sort of caught up to that.

And so after a redesign where it was much clear about accountability. So we were a very matrixed organization and we went from having multiple people accountable for certain things to, okay, we have one person who's responsible for growing that business and expanding the profitability. And so I think that was a cultural shift for us in a lot of ways that laser-focused accountability to another level.

And frankly, that business had to be corrected. Otherwise, it was unsustainable. So a lot of the conversations were around how do you deploy capital to a business where the profitability and the return on invested capital wasn't to the profile that we would expect. And so we had to reset relationships with customers.

It was -- we did it in a very professional, methodical way so that we would not damage long-term relationships. And Brian and I were just reminiscing about it because I said you were grilling me about whether it was a durable, but it was a good conversation. And at the time, it was unknown whether that was a durable set of price increases. Now we know.

And we measure our market share gains very precisely in that business. And I will tell you, in spite of those, we are continuing to gain share. So that tells me that, that pricing was warranted, necessary and durable. And we were just talking a minute ago, I believe there's actually one more step-up in pricing, not only in that business but culturally for Donaldson.

But it's less about sort of attitude. It's more about being very, very precise about the portfolio because we have a very wide range of products and the margin profiles on low margin or low-volume products versus high volume, I think we can get very precise there and see one more step-up in pricing and margin. And that will be part of our new operating model that we'll be talking about, especially as we get to our next Investor Day sometime next year.

Yes. The first roughly decade that I covered the company, one of the main messages was always when the question around price came up was we're absorbing about 100 basis points of price downs every year and offsetting it with productivity. And so this has really changed -- that's why it struck me that day.

It's changed the nature of the financial profile significantly where it was 11%, 12% operating margin company for a long time, and there was step up to the 13% to 14% range, but now you've broken into the potential to go higher and price is a big part of that.

What do you see as the potential for operating margin longer term? Tod was kind of open about this kind of a blue sky scenario. I don't know how much you'd like to talk about where it could go longer term.

Well, we certainly do not constrain it on the top end. And as we put together long-range plans, and we'll talk more about those in the future. But certainly, we see further expansion in operating profit and numbers that start with twos not ones. So I certainly believe that's part of our longer term.

It's a combination of operating discipline, leveraging fixed cost base, but it's also around mix and where we're growing. And a lot of our growth investments are into higher margin, higher growth parts of the market. And so as the mix changes, that will mix us up. So it's less about taking more price for ourselves, and it's more about where we're going to grow, even though there is more pricing to be had.

So potential for 20% plus operating margin for the record.

Correct.

And for all the AI bots that are scrubbing the transcript.

Brad is our CFO. He does -- he's been instrumental in our long-range planning. I'll certainly let him weigh in here.

Agreed for the record. Yes.

Okay. Can you talk a little bit about -- there's so much discussion around the AI data center theme. And a couple of the areas of your business that touch that are the disk drive filtration business as well as you're in filtration for power gen and gas turbines. And so how is that affecting your business?

Yes. So maybe just to kind of level set. So we come at the data centers 4 different directions. So we have a microelectronics business where we're into providing pure, sterile, call it safe, pure air, high-purity air or chip manufacturing. So those end up in the computing power of AI. We've got the disk drive business that you mentioned on the storage side, power gen.

And then finally, our food and bev business, we've been expanding into data cooling. So a lot of these data centers were using air cooling, and because of the intensity of the computing and the heat, they're moving more to liquid cooling. And the same applications and products that we use in some of our food and beverage products can actually be used for these data cooling centers.

It is part of the growth story in Q3 of our food and beverage business, which, frankly, is broader than food and beverage. But the 2 big ones are disk drive and power gen. And if you look, the disk drive -- hard disk drive manufacturers are all going gangbusters. They're building at peak levels. Same thing for the gas turbine manufacturers. So we see large tailwinds, sort of abnormally good tailwinds in those markets with legs to run.

We would see power gen going into the next decade. And on the disk drive side, it's really just going to come down to throughput. How much more can our disk drive manufacturers increase outputs. For us, it's not necessarily constrained by that because as the technology changes, our value and the content per drive for Donaldson is going up. So the dollar per drive for us is increasing as they shift to their next-generation technology. And so we see growth in both of those businesses for the years to come.

Can you put a finer point on that change in technology that's happening in the disk drive space?

Yes. If you think back -- if you go back to like when hard drives were the storage device of choice for notebook computers, laptops. The filters in there were like the size of your fingernail, and they were a few cents per filter. Then they went to more sophisticated technologies as they started going more into the cloud and servers, they call nearline drives, and they went up tenfold in content.

And now there's this next generation, which really gives us industry legs for quite some time. It's called HAMR, it's Heat-Assisted Magnetic Recording. It was launched by Seagate, but the other drive manufacturers have their own versions -- and frankly, they're now working on the next generation past that because that's launched and starting to scale up, and that increases our content even further. So think about the nearline going up 2 to 3x in revenue per drive.

For Donaldson, your content is up 2 to 3x...

On those drives, 2 to 3x what a typical nearline. So even if the industry stays flat from a capacity standpoint, if they convert to that, it's increasing our dollar content. And it's a very, very complex technology. We are investing in that business, more clean room space to support these 2 operations. And it's also allowed us to take more market share because this technology jump has been really challenging for the industry and not all supply base meet those demands.

Yes. Perfect. Okay. We'll leave it there for now. We'll continue the discussion in the Richardson room. Thank you very much for being here.

Hello, everyone. Thank you for joining us, and welcome to the Donaldson Company Third Quarter Fiscal Year 2026 Earnings Webcast and Conference Call. [Operator Instructions] I will now hand the conference over to Sarika Dhadwal, Head of Investor Relations. Please go ahead.

Good morning. Thank you for joining Donaldson's Third Quarter Fiscal 2026 Earnings Conference Call. With me today are Rich Lewis, President and CEO; and Brad Pogalz, Chief Financial Officer. This morning, we will provide a summary of our third quarter performance and our outlook for fiscal 2026. During today's call, we will discuss non-GAAP or adjusted results. For third quarter 2026 non-GAAP results exclude pretax charges of $9.8 million, including $9 million of restructuring and other and $800,000 of business development charges. This compares to prior year pretax charges of $65.8 million, including $4.2 million of restructuring and other, $800,000 of business development charges, $62 million for the impairment of intangible assets 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.

Before I turn it over to Rich, a quick note on our recently completed acquisition of Facet Filtration. Facet performance will be included in our consolidated fourth quarter earnings results reported in the Aerospace and Defense business unit within Industrial Solutions. With that, 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.

I will now turn the call over to Rich.

Thanks, Sarika, and good morning, everyone. Third quarter was a strong quarter for Donaldson Company, and as expected, marked a significant step-up in performance from our second quarter results. I am proud of our team whose hard work resulted in the company's strongest quarter to date with respect to sales, adjusted operating margin and adjusted EPS. We successfully navigated macro uncertainty, including uneven cyclical dynamics and the ongoing conflict in the Middle East. To that end, I specifically want to thank our team in Abu Dhabi, whose dedication and resolve have been on display over the last several months. Our leaders have ensured employees feel as safe as possible and that our local operations continue.

Globally, this quarter, we continue to serve our customers through our expanded product portfolio and high on-time delivery rates, including in the higher-margin mobile solutions aftermarket business, Food and Beverage and our Disk Drive business. We made further progress on optimizing our cost structure as we closed the last 2 plants identified within our footprint optimization initiative. We are now focused on ramping up production in the receiving sites, which puts us on the path to delivering incremental efficiencies in the future.

Lastly, subsequent to quarter end, we closed our acquisition of Facet Filtration, adding high-performance fuel and fluid capabilities to our expanding Industrial Solutions product portfolio. Facet increases our exposure to durable growing end markets, including aerospace and power generation and strengthens our aftermarket position with approximately 70% of revenues driven by recurring regulated replacement part sales with highly accretive margins. We welcome the Facet team to the Donaldson and integration efforts are underway.

As demonstrated this quarter, Donaldson is committed 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 then leverage these technologies across multiple end markets, our ability to help customers meet evolving environmental and operational goals by helping to protect equipment, processes and people and our clear strategic and balanced growth strategy. This is how we have and continue to win.

Now I will cover some third quarter highlights. Brad will discuss the quarterly financials and full year guidance in more detail, and then I will return for some closing remarks.

At a high level, sales were a record $995 million, 6% above prior year, driven by currency translation, net pricing benefits and volume growth. Operating margin was 16.6%, up 30 basis points over prior year and an increase of 260 basis points from second quarter. Expense leverage on higher sales was partially offset by gross margin pressure from production shifts to support customer-specific requirements in Power Generation within Industrial Solutions.

Adjusted earnings per share were $1.06, 7% above 2025.

Now I'll cover some highlights by segment. In Mobile Solutions, sales were $630 million, up 8%, inclusive of strong volume growth. Aftermarket sales were $498 million, up 8%, with growth in all regions and in both channels. We grew double digits in our independent channel where our product availability, reliability and consistency continue to drive share gains. This quarter, we had a large competitive win with a major North America fleet operator supplying a mix of air, lube and fuel products. These types of programs allow us to strengthen our future dealer relationships and create meaningful future pull-through opportunities for incremental sales.

On the first-fit side, off-road sales were $104 million, an increase of 9% versus prior year, led by strength in construction. On-Road sales of $28 million increased 5% as truck production began to ramp, particularly in EMEA.

Touching on China within mobile, sales were up 6% due to strength in off-road. Performance in China has been encouraging, and the growing export market is supporting demand for our technology-led solutions.

In Industrial Solutions, sales were $282 million, down 1%, driven by volume declines, partially offset by net pricing and currency benefits. IFS sales of $237 million grew 2% from net pricing and Power Generation volume growth, primarily in EMEA, where sales of new equipment more than doubled as we continue to benefit from the super cycle.

Partially offsetting this favorability were volume declines in new equipment sales for industrial gases and dust collection. Importantly, we are encouraged by the positive macro indicators we are seeing for our CapEx-based businesses, including strengthening industrial production and capital expenditures in certain regions, including North America and APAC. This more supportive backdrop, combined with our new product introductions, gives us confidence in our ability to win in these markets. Last month, we launched our Strato Smith collector as part of our dust collection product portfolio. With modern machining operations, elevated levels of smaller mist particles and contaminants need to be captured. We are solving this customer problem through Stratus' reliable, continuous duty filtration, which comes in a space-efficient footprint and supports multiple industries. Early indications are positive, including strong customer interest and quoting activity.

Switching over to Aerospace and Defense. Sales were $45 million, down 14% versus 2025 due to weaker new equipment sales. Volumes were pressured by ongoing supply chain constraints and project timing.

In Life Sciences, sales of $84 million increased 13%, largely as a result of robust new equipment volume in Food and Beverage and ongoing strength in Disk Drive. Momentum continues in our Food and Beverage business, where sales grew over 30%, supported by new equipment sales and with a growing installed base driving consumables demand. We are excited about the customer and channel partner reception to our new technology-led offerings and continue to build out our portfolio.

In March, we expanded our LifeTec product line by introducing our most advanced high loading performance filter largely for use in bottled water filtration applications. This product is built with Donaldson membrane manufactured in our own material research center and is designed to improve efficiency and filter life, driving lower total cost of ownership and value to our customers.

In summary, I am pleased with our third quarter results. We exited the quarter with robust order volumes, elevated backlogs and focused execution, giving us confidence in delivering on our record organic guidance ranges, inclusive of record sales of over $3.8 billion or a 4% increase over prior year, driven by growth in several key high-margin businesses, operating margin expansion versus 2025, earnings per share roughly 8% above prior year and free cash flow conversion of approximately 90%, important as we remain committed to returning value to our shareholders.

With that, I will now turn it over to Brad, who will provide more details on the financials and our outlook for fiscal 2026. Brad?

Thanks, Rich. Good morning, everyone. The topic we have been discussing with many of you since our last report was our plan to drive a strong sequential improvement in operating margin, and we're pleased to say, on that point, we delivered. While the operational work is not yet done in our Industrial segment, our Mobile and Life Sciences segments performed very well, all complemented by sharp prioritization of initiatives across the company. I want to thank my global colleagues for their diligence and commitment as we propelled the company to new records for sales, operating margin and EPS.

As I detail third quarter results, note that my profit comments exclude the impact from the nonrecurring charges Sarika referenced earlier.

Total sales increased 6%, and adjusted EPS of $1.06 grew 7% over the prior year. Third quarter operating margin of 16.6% was up 30 basis points from the prior year and at an all-time high. Versus second quarter, operating margin increased 260 basis points due to both gross margin improvement and expense leverage.

Breaking down the components of the year-over-year operating margin expansion, expense leverage remains a consistent strength at Donaldson Company.

Third quarter operating expense as a rate of sales was 17.8%, an improvement of 40 basis points from the prior year, showcasing the structural expense discipline that affords us the latitude to make investment choices while driving margin expansion.

Third quarter gross margin was 34.4%, down 10 basis points from 2025 as benefits from pricing, volume and mix were more than offset by about 100 basis points of headwinds from short-term operating inefficiencies in our Industrial segment. More specifically, we realized about 80 basis points of pressure from the production shifts to Mexico for large turbine systems in our Power Generation business. We are seeing improved delivery performance and operational alignment, so we view third quarter as the low point and expect to be fully recovered midway through fiscal 2027.

Footprint optimization initiatives added a little under 20 basis points of pressure due to costs associated with plant closures and transfers of production. These initiatives were designed to improve our cost structure and the last 2 plant closures were completed during the quarter. The work is now transitioned to ramping up productivity in the new locations. We expect these industrial-based initiatives to generate annualized benefits of about $10 million once we hit run rate productivity during fiscal 2027.

I want to take a moment to recognize the teams that have been working on these projects. It has been an incredible effort, and we're in the final stages due entirely to their commitment, collaboration and resilience. The work being done strengthens Donaldson's foundation for long-term success. So I want to especially thank everyone involved in this massive undertaking.

In terms of profitability by segment, the gross margin impacts from power generation and footprint optimization drove pressure on the pretax margin in our Industrial segment, which was 13.4% in the quarter versus 18.1% in the prior year. The margin was lower than we anticipated, but did step up from the second quarter. We expect that trend to continue in the fourth quarter, driven by higher sales and improved operational performance.

In our other 2 segments, we were pleased with the profit performance. Mobile Solutions margin was an all-time high of 20.2%, 210 basis points above prior year, primarily due to volume leverage and favorable mix related to aftermarket sales strength. Life Sciences pretax margin was 8.1%, up 30 basis points from the prior year. Importantly, last year's profitability benefited from an earn-out reversal from the Purilogics business. Excluding this prior year onetime benefit, pretax margin would have increased more than 8 percentage points. Volume leverage and favorable mix from our higher-margin Food and Beverage and Disk Drive businesses, combined with a focused expense structure, drove the improvement.

As of the end of the quarter, the company remains in a strong position with robust orders, record backlog and notable progress made on the footprint projects, all of that factored into our revised outlook for fiscal '26, which contemplates another sequential step up in sales and margin, and we will also have Facet included in our results for the first time.

Given the newness of Facet, I want to break out our guidance in terms of organic performance, and then lay out the impact Facet will have on some key measures. With that, our consolidated organic sales are expected to grow between 3% and 5%, with the midpoint being about 1% higher than prior guidance due to sales strength in our Mobile Solutions and Life Sciences segments. Additionally, pricing and currency translation are each expected to contribute a little more than 1% to growth.

In Mobile Solutions, sales are expected to grow between 3.5% and 5.5%, slightly above our prior guidance, driven by an improved, but still mid-single-digit increase outlook in aftermarket sales as a result of share gains and higher vehicle utilization rates.

In our first-fit businesses, Off-Road sales are projected to grow mid-single digits from improvements in select end markets, and On-Road sales are expected to decrease low single digits versus flat previously as global truck production remains tempered.

In Industrial Solutions, organic sales are forecast to be between flat and up 2%, with the midpoint of this range consistent with the prior guide. IFS sales are expected to grow in the low single digits, driven by robust volume growth in power generation and favorable currency and pricing in dust collection.

Aerospace and Defense sales are projected to decline mid-single digits due to the timing of certain programs as we continue to navigate supply chain issues. In Life Sciences, we project sales to increase between 9% and 11%, up from 5% to 9% previously, reflecting continued volume strength in Food and Beverage and Disk Drive.

With our focused expense structure, we expect full year pretax margin in the mid- to high single digits.

Driven by our year-to-date performance and reflective of another margin step-up in the fourth quarter, our organic operating margin guidance is now forecast between 15.8% and 16.2% versus 16% to 16.4% previously. The current range implies full year organic operating margin expansion between 10 and 50 basis points. with expense leverage being partially offset by gross margin pressure.

It's worth reiterating that our fiscal 2026 margin performance will be at a record level despite dealing with temporary operational inefficiencies, which we advanced meaningfully in the quarter and have a clear path to eliminating.

With the strength of our underlying business, I am confident we will get past these headwinds and generate more meaningful margin expansion in future periods.

Now I'll give a few points on Facet's impact to what I just laid out. We expect fourth quarter sales between $25 million and $30 million, adding around 70 to 80 basis points to the full year growth rate. The impact on operating margin is likely immaterial this year as robust business performance is offset by amortization costs. Debt incurred from the transaction will add about $9 million of interest expense in the quarter, with the net dilution to EPS of about $0.03.

Excluding Facet, adjusted EPS is projected between $3.94 and $4.01 per share, with the midpoint reflecting an 8% increase from the prior year, about double the rate of our sales growth.

Now on to our balance sheet and cash flow outlook. Our capital expenditures are expected to be between $60 million and $75 million, with focused investments, including new products and technologies across all segments.

Rich highlighted several new product introductions earlier, and we intend to continue leading in the area. We project cash conversion in the range of 85% to 95%, an improvement versus 2025 and consistent with historical averages.

Our balance sheet remains a strength. Including Facet, our leverage ratio is approximately 1.8x net debt to EBITDA, still leaving us ample financial flexibility to thoughtfully invest for future growth.

Integral to the Donaldson's story is our capital allocation strategy, how we build for our future and simultaneously return value today. Our priorities in that regard are unchanged. First, reinvest back into the company. We're committed to maintaining our position as the leader in technology-led filtration. We do this through our R&D investments in strategically important high-growth, high-margin areas where we have a clear path to win. We are proud to have a portfolio of patent-protected products and have nearly 3,000 active U.S. and international patents, with over 120 patents awarded in calendar year 2025.

In addition to R&D, we think critically about our investments in working capital and capital expenditure, investing for efficiency today and growth for tomorrow by ensuring we meet our customers' needs.

Our second capital deployment priority is disciplined M&A. We will continue to pursue opportunities that strengthen our portfolio and meet our strategic and financial criteria with Facet being an excellent example.

The financial strength of Donaldson is evidenced by our ability to invest for profitable growth and still return cash to shareholders. With that, our third capital allocation priority is dividends. As of the end of calendar 2025, we have paid dividends for 70 years in a row. We've also increased our dividend for 30 years in a row and recently announced an additional 7% dividend increase.

We're committed to remaining as a proud member of the S&P High-Yield Dividend Aristocrat Index.

Share repurchase is our fourth capital deployment priority. Share repurchase is our variable lever, and as we indicated last quarter, we have paused our repurchasing activity to focus on paying down our Facet-related debt. Year-to-date, we have repurchased 1.2% of shares outstanding, offsetting stock compensation dilution. As Sarika mentioned, beginning in the fourth quarter, our reporting will include Facet, and I'm excited to fold their financial strength into our results. We're working towards a strong finish to fiscal 2026, and I'm confident our strategy, deployed by the talented Donaldson teams around the world, will deliver.

Now I'll turn the call back to Rich.

Thanks, Brad. While I've been at Donaldson employee for over 2 decades, my first 90 days as CEO have been remarkable. I've had the chance to meet with countless employees, customers and investors around the globe, and I am increasingly proud of the work we have collectively done to fulfill our mission of advancing filtration for a cleaner world.

Our deep technical expertise, strong culture, track record and financial position have allowed us to operate from a position of strength, and I take great pride and responsibility in building upon that success. For more than a decade, our strategic investments have driven the growth and diversification of our high-performing company, and there is ample opportunity for us to further enhance our performance.

We are continuing to invest in attractive markets where we have a clear path to win while also critically evaluating our existing portfolio of businesses, ensuring each business has earned a place in our portfolio. With this rigor, our foundation becomes stronger, positioning us to deliver value for all of our stakeholders.

I am excited about the journey that lies ahead and humbled by the opportunity to lead such a talented organization through this next phase of our evolution. I look forward to reporting on our progress.

With that, I now turn the call back to the operator to open the line for questions.

[Operator Instructions] Your first question comes from Bryan Blair with Oppenheimer.

I was hoping to level set a bit on footprint optimization, power gen ramp-up and the impact on nonindustrial margins there. I realize that most of the pieces are now in place and it sounds like you're teaming is confident in driving better operating leverage going forward, but there's still quite a number of moving parts at hand. Is the right way to think about this that by the mid-point of fiscal '27 you're back, all else equal, to 18%-ish margin in the prior run rate and then we're layering on the $10 million in cost savings -- or there -- is that unfair or overly aggressive based on mix outlook or any other consideration?

Yes. Brian, I would say if you just take footprint and the power gen situation and factor those in, I think that's a fair assessment. That would put us clearly back to prior high watermarks for the Industrial business. And then I think as you look forward from there, we'll have the rolled in savings that we had mentioned. Of course, if there's other major mix changes that could have an impact, we'll have to explain those and talk about those as those arise. At this point, I would not foresee anything meaningful at this point, but we'll continue to monitor the situation and keep you informed.

Okay. Understood. Obviously, on [indiscernible] for about a month now, so obviously, early days. Maybe offer a little color on the initial steps of integration, remind us of the cost synergies contemplated in your deal model? I believe that's all procurement, and then most importantly, elaborate on commercial synergy potential. If I recall the phrase, correctly, the journey of refinery to the wing that has a nice [indiscernible].

Yes. So as you mentioned, we just closed Facet. And I would just tell you, if you just go back to the sort of the rationale for the acquisition, it's a great end market with a lot of natural tailwind, higher margins. So I think, double our margin profile, higher growth rates. We continue to be encouraged by what we've seen. We did our first deep business review with the team post close and the outlook for the business over the next 12 months, even in spite of the situation in the Middle East, is still strong. We're very encouraged by what we're seeing with Facet.

From a cost synergy, you're right, it's all on the procurement side. It was in the neighborhood of around $4 million to $5 million. Brad can clarify the exact amount. And then on the revenue synergy side, we didn't build any revenue synergies into our justification, but we do believe that there are some. So for example, they'll sell a fuel system into a particular marine application. It also requires air filtration. So they have relationships with customers that we do not, and we have relationships with customers that they do not. So over time, we believe we'll be able to leverage additional growth synergies. It's not determined at this point how large those will be, but we're encouraged by what we've seen so far.

Nothing to add for me, Brian. Rich has the cost, right? And I think it's just -- it's been a good month of getting to know the team and starting to work the plans together.

Your next question comes from Angel Castillo with Morgan Stanley.

This is Oliver on for Angel this morning. Just a quick question on your operating margin guide. I mean that seems to imply a pretty substantial step-up in 4Q in Industrial Solutions. Can you just help us bridge some of the key drivers there? Is it mostly mix, or operating leverage or something else there?

Oliver, yes, I mean, you've got it right. We're definitely implying the step-up in Q4. And as I commented in my remarks, we expected more of a step-up in Q3, but we feel good about the endpoint where we've worked through some things. And as I noted on the footprint specifically, 2 plants were closed and now it's about that final phase of transitioning and getting productivity in the new homes. So the step up there is really about improved operational performance. Volumes are contemplated up from here. And then on top of it, some of the more meaningful headwinds are behind us in terms of overall profit.

Okay. Great. That's helpful. And then just a question on A&D. I mean, year-to-date, it seems like we're down kind of in the mid-teens organically. Can you just give us a sense of the orders in the backlog, if you can still ship those this year with the supply chain constraints? Or potentially, does this become a tailwind in 2027 if we all ship those orders then?

Yes. Oliver, if you think about...

[Technical Difficulty]

Please hold for technical delay.

All right, Oliver, we're back, we lost connection. So A&D, we exited Q3 with near-record backlogs. And it's been increasing steadily throughout the year. So there is an element of, hey, we only have 3 months left, how much will we be able to get out. And as you mentioned, there are some recurring supply chain issues that we're working through. I -- we do expect that you'll see continued improvement in the next few quarters, but as the tailwind into F '27, that's probably a good way to think about it.

Your next question comes from Adam Farley with Stifel.

Maybe first on the Mobile aftermarket strength, just a little more color on how the OE channel progressed following last quarter's expected balance sheet management? And then what's driving the double-digit strength on the independent side?

Yes. So Adam, if you think about -- let's just talk about the OE side. We came out of Q2 and the OEs were aggressively managing their balance sheet, as you mentioned. The expectation was we would see a reversal of that. I think clearly, that came through. I would call it probably a destocking in Q2 and a little bit of restocking in Q3, and we'll have straight pull-through demand in Q4, albeit at a very high level. Just in general, utilization rates are really strong right now globally, and we see that very broad based. It's not just 1 region, it's across the entire world through both channels.

On our independent aftermarket side, we mentioned that we had picked up a nice new business award that will start shipping here in Q4 and will be a nice tailwind into next year. So overall, a mix of volume, pricing and we feel really encouraged by what we're seeing out in the market right now.

All right. That's really helpful. And maybe staying on the Mobile business. On the first-fit side, how do you characterize the end markets maybe on a relative basis? I know you called out construction, but maybe what are you seeing or expecting on some of the other end markets in first-fit?

Yes. So look, let's start on the sort of the positive side, so construction, as you mentioned, mining, they continue to run sort of, I'd call it, mid-cycle levels, good order patterns. On the ag and trucking side, we continue to be at trough levels or near those levels. We have seen pockets of improvement in certain areas of ag, I think small ag and turf, but those are more niche applications, I'd say broad-based ag remains constrained.

On the trucking side, we're seeing elevated order patterns, especially in North America in the second half as we enter the new EPA regulations in 2027, but overall demand on both of those markets for the first-fit remains muted. And as we spoke a minute ago, most of our revenue, over 75%, is recurring revenue on the replacement side, and we can see those demand and backlog is still remaining pretty strong.

Your next question comes from Brian Drab with William Blair.

I just wonder if you can talk a little bit more about the Aerospace and Defense business. I know last quarter, I think the main issue you highlighted was project timing. Now I think it sounds like project timing and supply chain. And can you just elaborate on what's happening in the supply chain? Is that your supply chain? Or are you seeing disruptions in customer's supply chain that's dampening demand and kind of give us some visibility there to when that gets resolved?

Sure. Yes. Thanks, Brian. And yes, maybe just start big picture, we're hearing from our customers. It does sound like from our customers that they have a number of supply chain challenges. Very rarely are our supply chain challenges the ones that are keeping them from building product. If you look at our specific situation, it's probably twofold. So let's talk about the lumpy project timing we talked about. We've seen a lot of strengthening coming out of the first half in our Aerospace and Defense backlogs. So that's those project timing, those new orders coming in that we expected. So that has strengthened significantly, really comes down to our ability to ship those. It's primarily on the system side. So if you think about it, these are large, engineered, highly complex systems that we're selling to our customers. And in many cases, we're waiting on 1 part or 1 material to ship those. So there is a handful of challenges that we're working through. Based on our time lines, we would expect the vast majority of these to be recovered through Q1 of next fiscal, into calendar year at the latest.

Probably the only one internally would be we did close that plant in California in the last quarter, and we're working on the ramp-up at the new site like our supplier challenges, that will also continue into the early part of next fiscal. But overall, we'll carry a strong tailwind into next year, and we would expect most of these issues to get resolved through a series of actions.

Okay. And then just one more on the outlook, the 3% to 5% revenue growth. What is the breakdown there between -- in your mind between price and volume? And how much is price contributing? And is this -- are you having to adjust based on tariffs and steel prices, et cetera?

Brian, the price is relatively consistent with where we've been so far this year, probably a little more than 1%. I will point out though, if you remember, 1 year ago, we were starting to lap the real hit from tariffs. We were paying those costs. So year-over-year, it looks a little bit different. To your question about what we're getting right now, of course, I think the biggest thing that we're all watching is the inflation and the impact from the Middle East conflict. And it really didn't come through in Q3. So I would say we're poised for that. We'll use surcharges where appropriate, we'll use price increases where appropriate. But that's something we didn't factor in meaningful incremental price in our forecast as that I would consider it more of an organic forecast in that regard.

Okay. And Brad, can you just quickly remind me do the Section 232 change impact anything? I know you moved a lot of volume to Mexico and you're shifting that into the U.S.

Yes, sorry, I didn't cut you off. Yes, the change there is, at this point, I would say, negligible for us. There's a few parts that we're looking at. And obviously, the metal content is the biggest one. So think about our hydraulic filters are a good example. But in terms of the net impact to tariffs and despite these changes with 232, it's not something that I would say is material for Donaldson.

Your next question comes from Robert Mason with Baird.

Just first question around Facet, the expectation that, that comes in about $0.03 dilutive, I guess, more or less on a GAAP basis. It includes the amortization. In the thought that the margin impact is immaterial in the fourth quarter, is that -- are those good benchmarks to annualize and carry into fiscal '27? Or is there anything unique about the fourth quarter? Presumably, you would deleverage some along the way, but how to think about that on an annualized basis?

Sure. You really touched on an important point is the deleveraging. So thinking about fourth quarter and we talked about roughly $9 million of interest expense, all else equal, that ends up being a high watermark as we work to pay it down over the course of the coming quarters. In terms of the net impact, the other side of it would be the expected and -- expected growth in revenue and then profit expansion that comes with Facet, whereas amortization, of course, ends up being a fixed amount. We'll give some more details on the very specific components of that when we do our fiscal '27 outlook in a few months. But, to your question, I would caution against just saying $0.03 times 4 is the annualized number. It definitely goes less than that. And as we said on the call last quarter, we would expect Facet accretion on a GAAP basis in year 2 and its cash basis much more quickly.

Understood. Understood. And just as a follow-up, Rich, your commentary around the mobile aftermarket certainly tended to the positive with some things kicking in here even in the fourth quarter on the share gain. But if I step back and look at what that -- your full year guide kind of implies, sequentially, it's maybe not as strong seasonal as I would normally expect. I don't know, maybe my math is off, but is that conservatism on your part? Or is there anything else kind of discrete that just keeping kind of the seasonal lift less than what we've seen historically?

Yes. It's a little bit of what we spoke about a minute ago where we had the OEs doing the destocking in Q2 and then they restocked probably, we think, to a little bit more aggressive level than pull-through demand. It's honestly a little bit hard to pin that down exactly. But we're assuming there'll be a slight pullback and we'll just have pull-through demand, no more stocking, destocking in Q4. I would say, to be determined, order rates still look really strong into Q4, but we'll continue to monitor throughout the quarter, but that's the main impact there.

Your next question comes from Laurence Alexander with Jefferies.

It's Dan Rizzo on for Laurence. So you mentioned -- I mean, obviously, market share gains are a big part of kind of the growth algorithm. I was wondering if it's of how we split between increased penetration with existing customers versus new customers, if new customers is harder to get or that's not how we should think about it? Or just any color on how that's working?

Yes. I would say it's really a business by business conversation because if you go to some of our businesses like in our mobile OE world, we have business with the vast majority of the large OEs. So it's about taking share with those existing customers. Disk Drive would be a similar story. But then if you get into like our Food and Beverage business, a big part of their Q3 story was taking share at new customers. We talked about last time the the cooling systems for data centers. That's a brand that's an adjacency that we've just pushed into. So I would -- it's a mix and it probably varies by business and the maturity of the business.

Okay. And then I'm sorry if I missed this. So obviously, interest rates going up, but you still have a well, a very healthy balance sheet. But I was wondering if you're shifting your strategic priorities to focus more on debt reduction and lessening share repurchases. I'm thinking more of 2027 and beyond, or just for 2027 really. I don't know if it going to be a short-term shift in how you kind of allocate your available cash?

Dan, so the share repurchases, as we talked about, we paused to do some pay down on Facet, but I would say this isn't a suspension at all. Share repurchase has always been the variable lever. We've got fresh debt minted right now. Obviously, we'll give more updates on our plans in a few months. But it's something that would ebb and flow based on our opportunities. And the point to make, too, is that we would still look for M&A opportunities in the market. It's got to be the right strategic fit. It's got to be something like a Facet, good qualifications that come with Facet, but share repurchase will move according to those opportunities.

Your next question comes from Tim Thein with Raymond James.

The first question, Brad, maybe 1 for you. Just on the gross margins and circling back to the comments earlier around some of the potential inflation bubbling up that hasn't yet flown through the P&L. Did that -- did the gross margin change, does that come into play? Or was it more on the industrial side and -- that impacted that? And I'm just thinking as we put the calendar to '27, based on where we sit today, which could change tomorrow, obviously, but just how you think your position is from a broader kind of price cost perspective?

Sure. Overall, we're positioned pretty well from price/cost. So the impacts in the quarter, as you point out, it was really about these very specific industrial things. So we talked about essentially reconciling 100 basis points of pressure that are attributable to the industrial segment for temporary activities. And all else equal, then that would imply gross margin up 90 basis points versus the minus 10% year-over-year. Price, volume and mix were all contributing there. So I feel like our pricing muscle is in a really good spot. To the extent that we see pressure from the Middle East, we'll react and we'll react quickly. And in the past quarter, it was only upside for us.

Okay. Interesting. And then on the aftermarket piece within Mobile, how do you -- I know you don't want to go out on thoughts on '27, but the new contract that you won, we're not talking a scope of the NAPA win from years past, I assume, right, in terms of how to size that?

Yes. You think about it in 2 pieces. So first, it's not the size of a NAPA win, but it is a sizable win. And what it does strategically is it gets our products on the shelf at a number of dealers that we had not been present before, which then creates future growth opportunities. We actually think the future growth opportunity is bigger than the current business award. So it is a nice catalyst for our growth over the next couple of years.

Maybe I'll add on that. I talked in my section about capital deployment and working capital. Every quarter, we hear from our aftermarket partners about wins that they've got in the field and some are bigger than others, of course, but it's consistent consistency and reliability that are helping us get share here. So this is a durable part of our growth plans in aftermarket as well.

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

Thank you. That concludes our call for today. Thanks to everyone who participated. We look forward to reporting our fourth quarter fiscal 2026 results in August. Thank you, and goodbye.

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

Hello. Welcome, everyone, to the 21st Annual Oppenheimer Industrial Growth Conference. Next up, we have the Donaldson team, represented by CFO, Brad Pogalz; and Head of IR, Sarika Dhadwal. Good morning to you both. Thank you for your time.

Good morning, Bryan. Hi, everybody. Thanks for the time. Brad Pogalz, CFO of Donaldson Company, and we've got a few slides to go through, and then happy to do a Q&A. Looking forward to it.

So before we get into it, of course, the fun stuff, our safe harbor forward-looking statements carry risks and uncertainties. But one thing that I think is an important relevant note is our fiscal year ends 31st of July. So we've just closed our fiscal third quarter, which puts us in a spot where comments today will harken back to our second quarter report and the earnings recap and release that we did late February. So a few months on from that. Happy to answer any questions, but keep that in mind that there's a caveat to that.

So as you think about Donaldson, the few key points for us, and I want to go through this with kind of the CFO lens today. And I'll touch on this, and again, Bryan, happy to do Q&A on anything. But for us, starting with a leader in filtration. We're 110 years old, and we serve really the most prevalent global names for our OEM businesses and then lots of aftermarket partners, dealers and distributors and customers along the way. Best-in-class technology. So we are a filtration company. And for us, what that means is that we start with the core capabilities of filtration and then extrapolate and leverage those technologies to support customers in really specific ways across markets. So we can invent a technology in disk drive filtration that helps us do membrane filtration for another application or technology that does diesel fuel filtration that we can leverage for filters in a power gen environment.

Things like that are at the core of Donaldson. Customers helping them meet their evolving environmental and operational goals. As equipment becomes more high-performing or more advanced in what it's protecting or producing, that almost always lends to better filtration, higher filtration requirements. So for us, and when we think about our opportunities, as the world keeps evolving, this is going to be a good place for us because we focus on advanced filtration. We have very limited exposure to markets that are lower tech and in some cases, we've almost entirely moved away from them. For example, we don't sell engine air filters for passenger cars. And this was a choice of management over a long time and this is who we are today.

Strategic and balanced growth strategy. So for us, this legacy position that we've got, we're 110 years old, especially in the OEM markets, using that technology and those relationships and capabilities to go into newer markets, high-purity applications in industrial processing, for example. And then life sciences market leadership. So looking at trends and again, thinking about our legacy filters where we've built technology to support tractors in the field and the dust that comes with that down to viruses and bacteria and filtering that out of a process, food and beverage, pharmaceutical production, things like those. So a lot of opportunities across Donaldson. And I would say that at the bottom of all of this, we're a durable company that has many different markets underpinning of technological capabilities.

So a quick overview. Again, 110 years old, 111 this year, 1915, about 14,000 employees. In the middle of the top, 3,000 active patents. This is what really speaks to our technological capabilities. And as we think about funding our R&D group, it's about white space and gray space where we're looking at next level of filtration in different markets and with different materials. On the bottom left, a diversified revenue base. We have 3 reporting segments. Mobile Solutions is 62%. And think about this as diesel engine filtration, air, fuel, lube, hydraulics and it's across heavy-duty applications. So off-road and on-road, but again, heavy duty. Industrial Solutions, this is a wide range of markets. It's about the factories. It's about power gen and it's about aerospace and defense. And then Life Sciences, 8%. Most of this business are businesses we've been exploring for many, many years. And there's a small, small part of it that was more about R&D into biospaces. So a few acquisitions, 2 of them pre-revenue, but again, expanding our technological capabilities.

On the right, you can see our revenue and earnings per share growth over the last 4 years. And this year, we've got a guidance for further increases in both of those measures, sequential records for the last 4 and again, anticipating that for this fiscal year. The historical financial highlights then, if we look at the far right column on each of these, you can see what we're targeting. So fiscal '26, midpoint of our guidance, as I said that we provided a couple of months ago. Fiscal '26 sales growth, 1% to 5% on top of the record in '25. Adjusted operating margin or EBIT margin, 16% to 16.4%. This would be a historic record for the company as well. And decent improvements as a function of gross margin and expense leverage. And then adjusted earnings per share at the bottom, the historic CAGR of about 10%. This year, growth of about 8%, following the 8% up from fiscal '25.

And then finally, I want to call out return to shareholders, $465 million in fiscal '25, and I'll come to capital deployment in a moment. One thing that's been on a lot of people's minds since we reported second quarter that we're working to elaborate on is the run rate over the course of this fiscal year. So this is our operating margin trends. Fiscal '25, the 15.7%, which you can see ties to the slide I just mentioned. First quarter 15.5%, second quarter 14%. And this was lower than our expectations. It resulted in a modest guide pull down for our full year operating margin. And the reason we call it out this way is I think it's important to note that there were some very specific things that were driving this.

First off, all of the decline is related to gross margin. Year-over-year, it was about 150 basis points decline in gross margin. Where that came from? Volume deleveraging due to the timing of orders in our second quarter. Second quarter is kind of a challenging analytical quarter for us because it includes a decent amount of holidays and then calendar year-end, fiscal year-end for a lot of our customers. So the second quarter is November, December, January. And the volume was very volatile over the course of the quarter, and we had some deleveraging. Part of that was due to a comp issue from 1 year before. We had a pretty notable benefit from it. So we expected a step down, just not to the extent that we had. The other couple of things are really specific to our Industrial segment business, operational efficiencies due to power generation. And we have a power gen business that's maybe mid-single digits of the total company sales.

This is a business that is driven by natural gas turbines, large, so the large OEs in the world, we filter the ambient air going in and then some smaller turbines. So think reciprocating oil and gas. In the large turbine business, over the course of this fiscal year, we had moved production to a facility in Mexico as a function of customer-specific requirements where their source of supply had to include some percentage from North America. We make most of these systems today in Abu Dhabi. We moved as a function of this customer, not chasing capacity, but leveraging capacity to meet the customer expectations. And the start-up phase of that had just taken longer than expected due to a variety of things. So there was margin pressure in this business due to that move.

The other side is the footprint optimization. And we've got a pretty big initiative that have happened over the last couple of years, and we're nearing the end of plant closures. We've got 4 facilities that by the end of this fiscal year will be closed, 3 already closed. And over the course of this fiscal year, we are finding ourselves in a place where kind of the competing pressures or dual pressures of ramping down productivity in the closing facility and layering on the productivity ramp-up in the new home for this facility. Those 2 things are stacking in the middle of this fiscal year. We anticipated that coming in. We're just calling that out. And the reason we spent a little more time on second quarter and why I wanted to elaborate with all of you today is we expected the second quarter was a dip and that we have a bounce back for the rest of the year.

The volume deleveraging, we expect to be more transient and that backlogs and orders at the end of second quarter signaled a very healthy position. So we would expect to get that back. We'll still be working on power gen and footprint optimization again, the stacking, the pressure from that gets reduced. So all in, a more meaningful step-up in the second half of fiscal '26 as a function of the comments on the slide.

So I'm going to switch now a little bit to a higher level again. But when we think about our durability in the market, a couple of things I want to add on this. I already talked about the history of filtration, excuse me, and with that comes some very deep customer relationships. But I think the couple that I want to highlight for the group diversified business with global scale and high aftermarket retention. So the diversified business, this has been a very strong part of how we've managed through cycles. So as many of you probably know, some of our OE markets like agriculture and transportation have been under a lot of pressure in recent years. And despite the pressure we're seeing on that side of the business, we're still growing in our Mobile Solutions business as a function of diversification and how we work with our customers. That allows us to have resiliency in many markets, and it gives us a chance to sort of mute some of these very dramatic trends that can exist in any one market, and we can handle it with scale as a function of our technology and footprint.

The other point I want to make on this part is I'm going to pull from the word diversified. Tariffs have been the topic of the conversation over the last year. And Donaldson since the implementation and post liberation day have talked about tariffs being a more immaterial part of our overall business, less than 1% of sales, $25 million, give or take, headwind from tariffs, which we would expect to anticipate offsetting via pricing. The reason we're more insulated is because we have built a company that has a diversified manufacturing footprint to go with our business. So we are where our customers need us to be. And consequently, that means that about 75% of what we make in a region stays in that region. So we have very little manufacturing footprint where we've built a place in China to bring it back to the U.S. or build something in Mexico to bring it somewhere way outside of the region, going to APAC or Europe.

Most of our operations are Americas, EMEA and Euro -- excuse me, APAC. And that gives us a lot of power because then we can handle things like tariffs in a meaningful way without having significant pressure that we need to go back and get pricing with our customers. And then in terms of the aftermarket retention, aftermarket today for Donaldson is approximately 2/3 of total revenue. So of our $3.8 billion, about 2/3 of it is some sort of recurring model. We win in aftermarket through a variety of things. First is, especially with OEs, they want to maintain their part of business. So in a lot of cases, the OEs, especially large OEs and mobile solutions, they're looking for lock and key solutions. They want to have proprietary products so they can retain their part business. Of course, that's very good for us, and it plays incredibly well to our strengths in terms of technology, form factor, applications engineering and then delivery.

But on the other side, we also win with availability and how we support our customers. And we really see this in many of our independent dealer distributor channels, where if they order a Donaldson filter today, they can get it very quickly, next day maybe. And for them, that's incredibly valuable because now they're supporting their end customer. They don't have to tell them to go away. Those 2 components are a big way we not just build but maintain loyalty with our customers on the aftermarket side. So continuing to expand aftermarket via this retention mechanism is a really high priority for us strategically and, of course, then financially.

Capital allocation. So over the last 3 years, center of the donut chart, we've given $1.6 billion to the 4 buckets you see on the screen, 18% M&A, that's a bit larger than what we've done in the past as a function of moving into some bio businesses, R&D and start-up, as I mentioned before. I want to come to a slide about a newly announced acquisition called Facet. Share repurchase moving around is about 40%. Share repurchase for us is something that we use as a lever depending on our other priorities, dividends and then organic investment. So now I want to prioritize it. First for me is investing for growth in the company. So it's about putting our money to work where we can drive organic opportunities and especially given our product portfolio and our footprint. M&A would be the next lever for growth. Third priority is about our dividends. We've paid a dividend for 70 years, and we've increased it annually for 30.

Remember, the S&P High Yield Dividend Aristocrat Index, and this is an important part of our construction of capital deployment. And then as I mentioned, share repurchase would be the lever on that. So in early February, we announced an acquisition, and we have not yet closed but it's of a company called Facet. And this is a business that is about $110 million of filtration sales. So you can see the stats at the top, $108 million in there last year, an EBITDA margin approaching 40% and 70% of that $108 million are consumables. So some sort of recurring revenue. You can see at the bottom, the composition, commercial aviation, 48% military, so defense is another 26% when you put them together and then other. And this other is industrial applications, power gen, things that are very adjacent to places where we play Donaldson.

But what's exciting about this business is, again, if you look at the donut chart on the left, about 80% of this is aerospace and defense. These are great markets, and we serve the critical applications that go into these markets. I'll skip over sales by geography and then some of the highlights on the side. Facet designs and manufactures the filters for these markets. And it's really about meeting very, very strict regulatory standards. Facet has 1 of 2 labs in the world for testing these standards or testing the performance against these standards. And what the standards do is make it very sticky for the customers. They're much more interested in our ability to maintain the high level of integrity we have in the filters now and maintain delivery. 236 employees, 7 countries, manufacturing sites, they have in Oklahoma, that's primary and then a smaller place in Spain.

And then you can see our TAM here is about $8 billion across these markets. So within the business case for Facet, we anticipate some cost synergies, largely procurement. These are filters. We know how to make them. But on top of it, as soon as we close, I'm sure our commercial teams are excited to get in and start working with that group on understanding what our opportunities to coordinate and drive synergies will be. It's an exciting business for us. Again, the stats at the top of the page. It's a higher growth company. And I feel really, really excited about the fact that we get to bring this into the portfolio at some point.

So I'll end where I'll begin, and maybe I'll just leave these on the screen for the Q&A. But I think the real takeaways here are this leadership in filtration and how we leverage technology to drive customer loyalty, connection, we're very deep with our customers. And I think this is a great opportunity for Donaldson and especially as we look ahead, more filtration, not less is probably what we're looking at in the world. So that's it, Bryan. I'll turn it over to you for any questions.

Excellent walk-through. Thank you. Before we dig in on the operating trends, I think it would be interesting to hear your thoughts on Donaldson's CEO transition. Tod was at the helm for quite a while, had a long successful run. What do you see changing under Rich's tenure? What remains the same? Just any high-level thoughts on that front.

Sure. Rich Lewis, our new CEO, took over right at the beginning of March. For the group, he has been with Donaldson more than 20 years, and he literally started in one of our plants and used manufacturing. As he worked his way up, his last big focus on operations was Head of Global Ops and named in the 20 teams, holding that role for about 8 years until he took over as President of our Mobile Solutions business, so moving on to the commercial side. After that, he did President of Life Sciences. And then just over -- or excuse me, just under 1 year ago, he took over as COO before becoming CEO. And I bring that up because Rich has also been part of the senior team for the last decade. And in a lot of ways, he was at the table as the architecture of our strategy came to bear.

So Bryan, to your question, I think we're -- it's not as though we become a different company. I think the opportunities with Rich are as we look ahead and the new opportunities with new filtration technologies, some of what Tod really did a great job pushing us down the road of. We've had very good capabilities with, I would call it, more traditional filter media. And when I talk about filter media, it's like it's the paper, the filter paper, combinations, form factors, understanding of the chemistries. We had incredible capabilities with this.

Tod really during his tenure, pushed us into more membrane and polymer-based filtration, which goes to a much, much higher level of filtration for different particulates. And as we look ahead, industrial applications, high purity, more advanced industrial processes, we're ready to start pursuing things like that. And I think that's where Rich is really focused. Another thing as we think about our growth is this push into expansion in industrial. And we'll talk about things like more customer intimacy in the industrial space where we understand our end customers better. We're more connected to our end customers, all with the goal of increasing our aftermarket parts.

Several years ago, in the industrial segment, aftermarket was maybe 1/3 of the revenue. Today, it's about 50% of the revenue. We want to keep growing industrial aftermarket as a function of these connections to our customers. And Rich is really involved in that part of driving investment and consequently, the results and strategy that come with that. And of course, with Facet, that's a big opportunity for us that all of the team here is really excited about. And that's not going to consume Rich's career at Donaldson, but it's certainly an exciting first place as we think about how to integrate and grow that business.

Sarika, anything you'd add there from things we've talked about or you've heard over the years?

No, I think that's exactly right.

Okay. All makes sense. Definitely want to get back to Facet in a few minutes. That's a big deal, literally and figuratively, so worth spending some more time on. I guess to level set a bit more, perhaps recap the puts and takes of 1H experience for Donaldson, you did mention some of the moving parts there, but walk us through that again and the setup going into the back half, specifically industrial margin, the inflection implied and the full year guide, that's a rather healthy step-up. So I just want to make sure that we have all the moving parts understood.

Yes, absolutely. So the experience in the first half, I would say, from a revenue perspective, felt all right. We have experienced some FX tailwinds. That was part of the guide change at the 2H point. But by and large, outside of the capital projects for industrial, things were going in line with where we expected and even a bit better. We raised our Life Sciences business as a function of some organic improvements. But the important part here was the margin step. And obviously, I spent a lot of time on that. So I can dig in if there are specific questions. I won't repeat my point. But I will say that the thing that Sarika and I have tried to do as we communicated second quarter is kind of this point at the top, if you see my cursor moving around is that we view this as more of a temporary step back.

So Bryan, to your comment about the 2H ramp, obviously, it looks substantial in terms of the absolute numbers. And anybody can do the math. We've got a 1H actual full year guide, so you can solve for a 2H number that is a pretty meaningful step-up from what we had in the first half. About half of that comes from expense leverage and then also gross margin improvement. So with the step-up in the second half, the expense leverage is about our continued discipline. We have been really active in managing headcount. One year ago, we did substantial restructuring in the businesses, especially Life Sciences to really prioritize. It wasn't everybody in every department in the company goes down x percent. It was a very surgical approach to focusing our efforts and all about prioritization.

Typically, we get a second half sales step-up. So if you think about our guidance, it's maybe 52% of the full year revenue lands in the second half, 48% in the first. A couple of dynamics there, but that sales step-up in the back usually lands with nice margin leverage in our second half historically. So more than 52% of our profit tends to be in the second half as a function of that step-up and leverage. The gross margin improvement is what I mentioned. It's sort of building on that and that the volume challenge is something that based on our backlog and orders we said should abate. We still have some work to do on the industrial process in terms of both power gen and the footprint. But overall, that will contribute to the step-up and progress will contribute to the step up.

Okay. That makes sense. I guess the only related question, again, just to level set would be the gross margin pressure experienced in the fiscal second quarter, we have the categories there. Can you size each? We know going forward, half volume leverage, half -- improvement to get back where you expect.

Absolutely -- what's that.

I can take that one.

Yes. Fire away.

Okay. So if you think about the gross margin compression, about 60 basis points of that was due to the volume deleverage. The second piece was the power gen, which was about 40% of the deleverage. And then footprint was about 30%. So you have 100 -- you have the bulk of the differential there. And then there was some mix headwinds in there, too, but that's the majority.

Okay. Understood. You framed tariff exposure and the relatively strong position that your team is in and why. Are there any changes in terms of the new framework that we should keep in mind positively or negatively? Or is the net impact reasonably similar for your team?

Yes. It seems to be about a wash from these moving pieces. The new 232 that happened at the beginning of April seems to have more of a specific impact on small part of our portfolio due to the metal content. The day after the Supreme Court ruling, the incremental 10% that went into effect sort of washes away the benefit from what IEEPA might have had if those go away instantly. So probably like everybody on the phone and all your companies today is we're actively watching this to see what happens in terms of both next leg of tariffs, if there are any and then also the refund side of it.

Okay. Understood. Now let's circle back to Facet. I'm very intrigued by that. Maybe offer a little more color on what makes the asset so unique, the deal rationale for Donaldson and how we should think about the impact or influence on your team's strategy going forward once you do have the asset in the fold?

Sure. Well, I think what makes it so unique is that the markets that Facet support are so highly regulated and/or mission-critical. So the quality of fuel being stored for military ships and the quality of the fuel being used on those ships, of course, is paramount to success that cannot fail. And the same would be true for jet fuel, commercial airliners or private or any military aircraft, anything in the sky, the fuel quality needs to be exactly right. So Facet has -- there's a line that I've used a lot and if anybody is on that's talked to us before, you would have heard it. It was a good concept that we pulled out as part of our due diligence is they serve on aerospace refinery to the wing. So Facet is kind of this interesting thing and that we talk about it as an aerospace and defense market, but it's really about almost the industrial process to support that market, which is includes many touch points on that journey of refinery to the wing where Facet has a solution for it.

So it's the movement of the fuel, the storage of the fuel in one location, the storage of the fuel at another location, selling to airports. All of that journey has quality standards, regulatory standards. And what we learned about the customer base as part of that process is they really, really want the integrity of the product to stay. And I can almost say it's sort of like some of the drug development workflows and that the switching costs, it's not worth the risk. This isn't about cost. It's about we can't risk some sort of change that compromises the quality of this fuel. So Facet is a really interesting business in that because the moat sort of expands as a function of multiple things. It's not any one thing. It's that this is a place where it ends up being a spec-in solution with very sticky customer bases.

So as we start to get into it, I think it's about exploring where the opportunities are for commercial synergies. An example I like to give on Facet is power gen. We sell ambient air systems to large turbines to bring in the air, to run the turbine and which converts to energy, of course, Highly complicated systems that we do. Facet is on power gen, but they're more at liquids at or on or around the turbine. So 2 different places in this location. Now these are things we have to explore, but it's things like that, that are part of what's exciting about this business. It's already high growth, and it puts us in a place where we have these complementary or adjacent types of products or solutions that we can look at how to build on our total portfolio.

Got it. That's exciting. It will be very interesting to see what happens over the coming quarters and years. Maybe offer a quick update on life science strategy, specifically bioprocessing. Your team has been upfront about the commercialization path being delayed relative to what you had initially pursued, hoped for. Has there been any meaningful changes in terms of the strategy itself? Or is it just time line? How should we think about that progression?

Sure. Well, for the group, just a bit of background on this. We started entering these bio spaces via acquisition in the earlier 2020s. We bought 4 companies, 2 that are upstream and it's about -- it's bioreactors, so cell cultures and development. And then 2 downstream that are more pre-revenue and they're about purification separation. So think of it as potential substitutes or chromatography process. The focus of the entry into these spaces was about niche technologies that we could apply to very specific cases. It wasn't just a generic push of let's get into life sciences. We have this sort of subset of the subset of the subset market in mind that we're not on commercial applications. So to Bryan's point, this takes a long time, preclinical, clinical and then commercialization. We have to run that cycle.

So the focus for us has largely been product development and get as many shots into different trials as we can via different mechanisms. The timing, of course, is where -- I don't know if I call it a learning, but as Bryan mentioned, we've been pretty open. This hasn't gone to plan. We've gotten the early 20s and a lot of the funding for our space is there dried up as a function of the post-COVID sugar rush ending. Where we are today, milestone-based. So it's about meeting the objectives. Each business has its own. And then I think, Bryan, just to put the point on as we think about acquisitions going forward, we're much less inclined for more pre-revenue tech companies than we are for things like Facet, with the scale of Facet aside, but more robust businesses, clear route to market, some aspect of commercialization. We need to see through what we've got in the bio space before putting more capital in there.

Understood. We have about a minute left. The path forward for Donaldson under new leadership, yourself included, still relatively early days leading the finance team. What's the most exciting prospect for your team? You're exposed to a lot. The fact that you have such vast institutional knowledge of filtration, growth vectors are quite broad. Are there any opportunities, 1 or 2 that you would call out as being truly the most exciting if we look forward 3, 4 years?

Yes. I think it's a little bit of what I touched on. Our capabilities in membranes and polymer-based filtration, we're really getting our footing now. This is something that we stood up a material research center in 2020, 2021. And the things that I think we'll be able to produce as a function of that are it unlocks new markets or expands existing ones. And I think these are places where we're going to find a lot of applications, and they're high growth, high margin. So this idea of mixing the company up into the higher support or higher-margin businesses is really important. And then the other thing that I think is really exciting is changes to industrial processes that give us new opportunities sort of the new factories, the standards increasing, the process, precision engineering. There's a lot of places where advanced filtration becomes more important.

So I think we're well situated there. And I just want to say the mobile business is a machine, and we continue to expect mobile solutions to be a big part of the company for a long time. This is a place where with the OEs, we can generate a very nice return on invested capital because of the capabilities that we have and the volumes they bring to the company is a function of really, really, really deep relationships. So I continue to be optimistic about what we can do there.

Excellent.

I can't rank my myself, maybe that's the way to say it.

I would just add one more kind of like as a foundation for the things that Brad just talked about is just the heightened operational rigor that we've been talking about a lot within our walls here at Donaldson. I think there's a lot of energy and excitement behind that.

Yes. Good point.

So that will ideally lead to additional leverage and margin expansion, and we're all looking forward to seeing that play out.

Yes.

Very good. I know we're past time. Thank you both for your time this morning and all the great color.

Thanks, Bryan. Appreciate it.

Everyone. We're going to stay on schedule here. So we have the team in from the Twin Cities from Donaldson here with us, been great and loyal supporters over the years. So I appreciate all that. Sarika Dhadwal runs IR, does a great job there. Brad Pogalz, the CFO; and then Rich Lewis, day 3 in the CEO's seat. So should have some good conversation there.

I think we'll start with some slides and then get into Q&A. So thank you again, Rich, and over to you.

All right. Thanks. Well, welcome to Donaldson Company presentation. My name is Rich Lewis. I'm the President and CEO, day 3, but I've been with the company 24 years. So we'll be interested in hearing your questions. And thanks for joining us today.

So I know you've seen this before, our safe harbor statement. Everything we talk about today will be as of our Q2 fiscal year '26 earnings, which was just released last week. Let me start by just telling you a little bit about Donaldson. We'll get into these points in a little bit more detail. But if you take away 5 things, these are the things I'd like you to take away. So we are the global leader in filtration. We've been solving our customers' toughest problems for over a century. We lead and invest in innovation, and we deliver best-in-class technology.

That is one of our main differentiators. We use that technology ultimately to deliver value for our customers in 2 ways. The filtration is a small part of the cost structure of the vast majority of our customers, and we're protecting their most valuable assets, their products, their people and their processes.

Secondly, we enable them to make more money using our products than the competitions. We allow them to lower their overall total cost of ownership. We have a balanced growth strategy. It's anchored in delivering growth in our core markets, where we've invested heavily over the last century and have durable competitive advantage, while we're laying the foundation for the next century of growth through expanding our addressable market share.

And then finally, to that point, if you look at our Life Science business, that really is around high-purity filtration that spans advanced industrials all the way into bioprocessing. We are laying a foundation of technology that can be used in multiple applications and multiple market segments.

At our core, that is Donaldson. So this is a good lead behind. You can look at this later. If you want to know a lot about Donaldson, it's a lot of information on one page. I'm not going to drain it. I'll just give you a couple of data points. As I mentioned, we're a 111-year-old enterprise. We operate in 3 reporting segments. We've continued to deliver top line and bottom line growth through all 3 of those segments.

Our anchor is innovation. We have 3,000 active patents, and we have 2/3 of our revenue in recurring revenue. So sticky through innovation and a lot of recurring revenue makes us a very resilient and reliable business. We operate throughout the world. We leverage our investments in both operations and in innovation across multiple markets, multiple applications and we do that throughout the world.

We have our in-region for-region strategy. We manufacture 75% of our products in the regions that it's consumed, which also makes us resilient to global disruptions, which we've had, obviously, plenty of those here lately. We talk a lot about our growth. Historically, we have been growing mid-single digits. In F '26, we have a top line growth projection of 3%. We'll grow EPS 8%.

Our goal is very simple, on higher levels of sales, we want to expand margin and grow our bottom line faster. I want to talk a little bit about Q2. So we just released Q2. As you can see on the chart, coming out of last year, we were running at record operating profit levels. Q1 was pretty much in line with that. And then we had a step down in Q2. Q2 is always a little bit of an anomaly for us. We have a lot of customers that manage their balance sheet at the very end of the calendar year, which would be their fiscal year. We also have significant holiday periods, where we have customer shutdowns.

So Q2 is always a bit of a little bit of a wildcard. But if we look at this year, we had a step down that was actually not just due to those issues. We had 3 specific short-term issues that we're working through. So the first one was we have a significant ramp-up in our power gen business. So when we think about data centers, we have multiple products that touch those, the power gen business being the most significant one. All of our customers are ramping up capacity. We're ramping up capacity to help satisfy them and get in-region content. We moved a significant product line from a facility in the Middle East to a facility in Mexico. We've hired -- we've basically doubled our workforce going through the learning curve and the training on that new product.

Second item was timing issues on orders, specifically in our OE business and our Aerospace and Defense business. Backlogs in both of those businesses are very strong right now coming out of the shutdown, our OE backlog stepped up double digits. And after Q1, our A&D backlogs are at significantly higher levels. So incoming orders are good. Backlogs are good. We expect those to be significantly better in the second half.

And then lastly, we had a lot of footprint optimization work. In the last couple of years, we've accelerated our gross margin expansion initiatives. One of those initiatives was closing several plants. We're in the throes of that right now. We saw a lot of cost pressure from that in Q2. 2 of those plants are closed. We'll continue to ramp up in the new facilities here coming up in the second half and 2 more closed this quarter. They'll close here in the next 60 days.

As we look forward, we expect those short-term issues to moderate. And you'll see in our guide, we're expecting sizable increases in the second half. So when we're done with the year, we'll have record sales, we'll have record operating profit margins, and we'll have record levels of EPS.

Talk a little bit about our durable competitive advantages. These span pretty much all of our markets. If you think about how we go in, we tend to go into industries very early on. We solve very difficult problems and we start to build trust. The moats that we create in almost every one of our markets are pretty consistent. We have a deep innovation bench. So we have technologies that span multiple applications.

We develop the engineering expertise. If you think about some of the markets we're in, our sales force are essentially trained engineers that are out selling because the applications are so technical. We have that deep application experience. And then around that, we invest globally to support our customers all around the world with very, very broad product portfolios, and it's all underpinned by a very strong culture of operational excellence.

So it's not really one item that is our differentiator. It's really linked and stacked competitive advantages that, frankly, are hard to replicate. As we look across all of our segments, we have headroom and opportunities to grow in each one of these. If you think about our mobile business, we've been investing for over a century in that business. We're continuing to harvest those investments. We're clearly the leader in that space.

Industrial, we've acquired significantly in this space over the last 30 or 40 years. We have opportunities to continue to scale and drive synergy in that business. And we're seeding our Life Science business with investments that really broaden the addressable market and our technology base.

A little bit on capital allocation. We're going to continue to have a disciplined approach. We expect that we'll continue to invest aggressively in organic and inorganic growth, and then we'll return cash to our shareholders. We've been increasing our dividends for the last 30 years. We'll continue to do that, and we'll use share buybacks as a temporary lever depending on how our M&A work is going.

Maybe I'll just end here, talk a little bit about Facet. We just announced our largest acquisition. This has not closed yet. We're going through the regulatory process as we speak. Facet is one of just a small handful of companies that do fuel filtration in the aviation space. It's a highly sticky, highly regulated, highly safety-driven industry. Facet brings margins growth rates higher than Donaldson company average.

I think EBITDA is 2x our company average and growth rates in the high single digits. It also brings broad adjacencies for us as they go from the refinery to the wing of the vehicle in filtering the fuel in multiple stages, sometimes up to 7x. We also have products that can sell into that from our other industrial businesses.

And then if you look on the vehicle, they're very strong in fixed wing and naval applications. We're strong in ground vehicle and commercial aircraft. And so there's a very complementary product portfolio from our products and theirs. So we're really excited about Facet joining the Donaldson family. We hope to close this over the next quarter or 2. This is margin accretive, cash accretive year 1, and it will be accretive to EPS in year 2.

So maybe I'll just end here because then we'll get to the Q&A. But just the 5 points that we just talked about, leader in filtration, high degree of innovation and technology, really solving our customers' main priorities, which is giving them peace of mind, protecting their assets, while we help them lower their cost of ownership.

Growth opportunities across all 3 segments, harvest, grow and seed across the 3 segments. And then finally, we're laying the foundation for higher margin, higher growth opportunities in the heavy industrial or specialized industrial and life science space. So that's Donaldson in a nutshell. I think I kept it on time, Tim. So yes. So we'll let you switch.

Yes. It's good. Maybe that's a good way to start us off. Rich, maybe just think about at a high level. So Todd put a number of initiatives in place under -- during his leadership. You've obviously worked with him for a number of years.

As you think -- are there areas of emphasis or initiatives within the organization that maybe you'll take a different slant towards or anything that investors should think about in terms of where you want to -- maybe want to put a little different stamp on how you lead the company?

Yes. So we'll -- we're going to have an Investor Day later this year in New York. We'll clearly lay out our strategy and very good depth at that point. I think if you look at the foundation of the company, the strategy is not fundamentally going to change. We're going to lead with technology, lead in innovation, try to find markets, where those technologies make a difference in the way our customers do business.

I think where we press maybe as far as the aggressiveness of the investment, that may pivot somewhat because it really is harvesting the growth and the investments in our mobile business, which we are clearly the market leader as we scale up our industrial business to drive greater operational efficiencies, while we're seeding our long term.

So all 3 of those will continue to be part of the strategy. Where we press from a financial standpoint and management attention may shift a little bit. But fundamentally, it's not a major change.

Got it. Got it. Maybe this is probably more relevant to the Mobile Solutions business. But one of the themes at this conference is amongst industrial companies and even just to broader cyclicals or in general, is just this idea of starting to see a little bit more green shoots in the market.

You have certain aspects and certain pieces of mobile that presumably would be more on the front end of that. Maybe just talk to what your conversations with OEM and distributor customers, what you're hearing.

Yes. So I think if you think about the replacement side, that business is north of 70% recurring replacement parts, strong utilization rates across all 4 markets. really nothing has changed there. We continue to grow our market share. Pricing has been good. So really stable performance on the replacement side.

The first-fit side, I think construction and mining sort of mid-cycle build rates. I would expect that to continue. The possible green shoots are on the ag and on the commercial truck side. We are seeing some early signs. We get long-range forecast from our customers, sometimes 12 months of EDI signals through when our computers talk to each other.

And we're seeing expected build rates in the truck market in the summer. We'll see if that comes to fruition. And we're actually seeing actual orders in some of our ag customers that are elevated over what they had been in the last couple of years. So I would call them early indicators of maybe there's some positivity, but I would not suggest that we're there yet.

Yes. Okay.

And Tim, as you know, I mean, when these markets come back, they come back fast. So that's why we're watching really carefully because we want to be prepared. We have the capacity. So we're going to lever well, when it does come back. But the main thing is making sure they can build all their vehicles and supporting them.

Yes. On the mobile side, the aftermarket being obviously such a big piece for you. You've outperformed in the last couple of years and on a handful of at least what you've provided externally in terms of some big customer wins. But maybe underneath that, talk about -- is there something you've kind of pushed through the sales arm in terms of the outgrowth has been pretty notable on the aftermarket side. So maybe talk about that.

Yes. That business is -- it's a business we've been doing for a long time from a commercial, operational and product side. It's a very robust, very capable business. As you said, part of the market share gains that we've seen in the last couple of years is coming out of COVID, there was significant supply chain disruptions.

We performed very well in that. We used -- there was a point in time where we had spent a lot of money investing in inventory just to buffer our customer service levels. What we saw was not everybody performed well, and there was some upset customers and they wanted to change. And so we picked up a lot of share due to competitors struggling. That was probably a onetime -- that doesn't happen every day. The more basic daily share gains are really selling our technology.

And we bring a lot of value to our distributors because we go out and we help train them so they can go out and grow their business. So they really are partnerships. And the better we train them, the better they can grow their business.

Got it. On one of the charts that sometimes gets a little bit overlooked or forgotten is just the globality of Donaldson and sub-50% of the business in North America. Maybe talk about trends outside North America, maybe where you're more or less optimistic, maybe focus on Asia and Europe?

Yes. So Europe and Asia have been strong points for us for some time now. We mentioned in our earnings call, 6 quarters in a row of growth in China. We probably haven't been sort of over flagging that because it would have been a while since we've seen growth there. But really, we're seeing really strong economic performance in Europe and Asia.

And frankly, most of the weakness has been in Latin America and a little bit in the U.S. on some of the CapEx. So when you think CapEx, I'm going out and I'm building a plant, I need a new dust collector, a new industrial hydraulic system. Those have been a little bit muted.

Yes, which I think is interesting because if you pull 10 companies on that idea of -- or that notion of maybe we're starting to see early signs of an industrial renaissance and reshoring all these buzzwords that we talked about within industrials and that's kind of throws a bit of cold water on that. So is it just the idea of just hitting the pause button, waiting for more clarity. What do you hear from here?

Well, I think 2 things. I think there's a lot of uncertainty out in the market. And so the quoting activity for some of our capital projects, I think, if you're on the data center side, it's just full steam ahead. So our power gen business is just cranking along the non-power gen side, a lot of quoting activity. Utilization rates are okay.

Our aftermarket businesses continue to grow there. So they are using the equipment in the field. But as far as new projects or retrofitting old systems, I think everybody is just sort of pushing their decisions out. The reshoring, I think, is very narrow. It's in targeted industries where there's support from the government to essentially -- we have to build these capabilities up.

Some of those play in our favor. If you think about trying to become more independent in semiconductor manufacturing. Well, we have a business in Asia that supports that industry, and we sell to all the chip manufacturing companies, but as far as general manufacturing, yes, we haven't seen it. And overall, the economic conditions are a little depressed right now.

You touched on it a little bit, but the data center exposure for Donaldson, I know that can be a little tricky because you have the kind of second or third derivative impacts. But how do you size it? And how would you say your -- how would you kind of frame your competitive positioning across the relevant?

Yes. So we're touching it multiple ways. We have businesses that sell into micro chip manufacturing. So the computers that go in there, we support that through them. The vast majority of the hard drives go in there have a Donaldson filter on them. So through those OEMs, we're seeing strong demand. We're seeing data centers convert from air filtration, which we don't participate because it's more HVAC in nature. Over to water filtration, which we have products, and we're seeing an uptick in interest there.

And then finally, and the main piece of it is on the power gen side. So a lot of the power gen customers, the small turbine, they're essentially taking the natural gas from source to point of demand. So there's -- they're using the turbines to compress the gas and move it. We have a good position there. That business is in strong demand.

And then because the data centers don't have enough ability to tap into the grid, there's a lot of peak in baseload systems being put on site with the data centers until that becomes available. So that would be on the larger turbine side. But yes, there's -- we're really -- we've got 4 access points to that market. And I'd say the power gen is significantly the largest.

Yes. So ballpark, single digit kind of...

Yes. We talked about this in one of our one-on-ones earlier. It's probably -- it's going to continue to grow. And I would say if our customers put on a tremendous amount of more capacity, they would surge in demand. I think how many -- how much capacity they want to bring on is yet to be proven.

But I do think we're seeing an elongated up cycle for sure. So instead of maybe a couple of year up cycle, we're talking multiyears of very, very high demand with incremental sort of think mid- to maybe high single-digit growth rates as they incrementally expand capacity.

Within the Industrial segment, something we talked a lot about with Todd a year ago was just how you're working to connect more of the assets, connect more of the machines in the factory. Maybe spend a minute on that. There can be a pretty powerful driver, I would assume, in terms of if those are your machines, you have visibility into the filter life, you kind of get the first shot in terms of that replacement sales.

So talk about kind of the interplay between the OE side versus what that brings from an aftermarket standpoint.

Yes. Connected Solutions, it really is part of our overall strategy in industrial, which is to increase customer intimacy. So if you think about some of our OEM businesses, we're interacting with our OEM customers every day, all day long. Power gen is an OE business. Our disk drive business is an OE business. Our mobile business is a large portion of it's an OE business.

So you have a natural customer intimacy. Some of our industrial businesses, they'll do a project and they'll buy replacement parts every 2 years. They might buy a new system every 10 years. And so you lose that connection with the customer until they have a need. We're trying to recreate the same level of intimacy we have with the OEs, #1, with data. So we've connected their solutions. That allows us to monitor their system, which helps us design better systems in the future.

The long-term outlook would be to use that data to optimize how their system is running at any given moment because a little bit of change in how the system runs can save them a lot of money in electricity. The second piece of that is that data allows us to have reach out points to the customers, hey, look, we see a problem with your filter, your system, can we come out and check it for you?

And when we come out and check it for you, not only do we sell filters into our systems, but we can also sell it into our competitors' systems. So it's really a holistic strategy to improve the first-fit design, have more touch points. We started as a subscription model. We were trying to sell the data, and we quickly realize that's not the value. The value is that customer intimacy, and we see higher win rates. When we sell -- when we are out touching customers that are connected and we service their units, when they need first-fit systems, our win rate is probably 15 points higher, and we see a much higher retention rate on replacement parts.

So it's a long-term strategy. We've put a lot of money and time into it. We bought several service companies, and we're really doing a full evaluation now that we've been into it for 3 or 4 years. But we continue to press forward. We should connect another -- we're in the thousands on the number of assets that we have collected, and we should keep increasing that at a rate of about 500 to 1,000 a year.

Relative to what's the big denominator, I mean...

Well, I think you're talking -- if you think -- if you go back 50 years, there could be 100,000 units out there. But if you think about the percentage of new ones that are going in the field that are connected, it's ratio. So I think over half.

Yes. Maybe I'll put Brad in the hot seat here on the chart that you showed in terms of the operating margin bridge, pretty sizable pickup there implied in the back half of the year. Maybe talk through your confidence level in terms of that these issues are -- will be more short term in nature.

And then as you think about that, I think it implies something like a 36-ish percent gross margin in that neighborhood as you exit the year. And then you've got -- you bring Facet online, you've got some of these savings. So maybe just talk to like at a high level, kind of how we should think about maybe puts and takes on that margin side?

So I want to underscore a point Rich made that the second quarter, there were a few issues in the quarter that we would view as more temporary, short term in nature. So the second half is bouncing back a bit from that. The part that I think is important is there's 2 dimensions to that increase. If you think about the step change of 1H versus 2H, a big portion of it comes from this gross margin improvement that you're mentioning, but also a decent portion from operating expense leverage.

So we have typical seasonality in our business where the second half steps up. It's more activity, especially in some of our mobile markets. And that normal seasonality is what's baked into our guidance. There's nothing heroic about the sales. We would expect our OpEx to stay at about the levels that we've seen in the last couple of quarters. So we'll get a nice leverage on top of that.

The gross margin, the first thing that Rich touched on, the volume, that was something very specific to the first -- or excuse me, second quarter, first half. And we have the backlog, we have the orders. So we have a level of confidence that coming in. There's some execution things there that we'll need to get that product out the door, especially with our supply chain in the aerospace and defense business, but that's something that we can work through.

And then the projects that we're working on and especially this Power Gen, I mean these are things that we're doing right now to try and improve the outcome for the second half. So exiting the year, you're in the neighborhood. I think we'll come out of the year with a gross margin much stronger than we had in the second quarter.

Obviously, the things that we're going to watch are not just the execution, but what's happening in the market. As the OEs start to rebound, a typical impact we see in the company is the mix pressure from large OEs, especially first-fit new equipment production that's got a lower-than-average gross margin, but it's something that we pick up with SG&A leverage and earnings growth.

So there's some dynamics to think about for '27 that my hope would be a year from now, we talk about the resurgence in the OE markets and everything is going well, but that's something we'll watch in the meantime.

Yes. The savings from the footprint realignment, is that -- have we seen any -- I mean, is that still on the come there?

It's still on the come. So we'll -- we've closed facilities, and we're going through the start-up phase in some of their new homes, and then there's facilities still to be closed mostly in this quarter, third quarter.

Got it. And is the right way to still think about operating leverage in the kind of low-20s as -- I know there's interplay between OE and aftermarket, but is that still kind of the right framework to think about?

Yes, that's certainly in the ballpark, too. That's been our historic levels. The second half, we're expecting it to be well north of that for the reasons I mentioned.

Got it. Okay. Maybe just in the final minute, Rich, what -- from your lens, what do you think folks miss or under appreciate about the Donaldson story?

Yes. I think -- it's interesting because I think it's -- if you look at the products we sell, I think the first assumption is it's a commoditized product. And there are portions of the market, if you think about your HVAC filter that goes in your home HVAC system, that's pretty commoditized. Where we sell into filtration matters. It drives a lot of value for our customers, and it's much more technologically deep than most people would understand.

I think the resiliency of the recurring revenue, which just continues to grow as a percentage, insulates us from a lot of the cyclicality of the markets, if I can say that properly, the cycles. And I think the long-term growth prospects across a lot of our markets are really untapped at this point. We still -- even though we're the leader, our market shares are not 40%, 50%.

I mean there's upside in a lot of these markets and then lastly, I would say, if you just look at our incremental margins as we grow, we still have a lot of upside on the operating margin profits.

Yes. So think of it -- I mean, the way you started with, these are revenue-generating assets that filter in my house is not -- I'm not generating revenue on my house. Is that just [indiscernible] simple way to think about.

Well, I think when you go to buy your -- not that you're not a savvy consumer. When you go to buy a filter for your HVAC system, it's like whatever you can buy off Amazon. When you're protecting a $500,000 vehicle that makes you x dollars a day that it's operating, it's important that you know what's going in there.

Excellent. All right. I think we'll close it there. Thank you, guys. Appreciate it.

Thank you.

Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome you to Donaldson Company's Second Quarter Fiscal Year 2026 Earnings Webcast and Conference Call. [Operator Instructions]

I would now like to turn the conference over to Sarika Dhadwal, Head of Investor Relations. Please go ahead.

Good morning. Thank you for joining Donaldson's Second Quarter Fiscal 2026 Earnings Conference Call. With me today are Tod Carpenter, Chairman, President and CEO; Rich Lewis, incoming President and CEO; and Brad Pogalz, Chief Financial Officer.

This morning, we will provide a summary of our second quarter performance and our outlook for fiscal 2026. During today's call, we will discuss non-GAAP or adjusted results. For second quarter 2026, non-GAAP results exclude pretax charges of $6.7 million, including $2.9 million of restructuring and other and $3.8 million of business development charges. This compares to prior year pretax charges of $6.6 million, including $2.2 million of restructuring and other and $4.4 million of business development charges. 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 Tod.

Thanks, Sarika. Good morning, everyone. Donaldson Company achieved record sales in the second quarter as we worked hard to meet strong customer demand across all 3 of our segments. Our underlying business is robust as evidenced by our high backlogs and continued strong order intake. While we face short-term execution challenges in our Industrial segment, we saw strength in areas such as independent aftermarket within Mobile Solutions and Food and Beverage and Disk Drive within Life Sciences.

We also announced the acquisition of Facet, the largest acquisition in company history, which I will discuss in a few minutes. Entering the second half of the year, I have confidence in the strength of our organization and our commitment to deliver on our updated fiscal 2026 outlook, which represents record sales of approximately $3.8 billion with operating margin and adjusted earnings per share at all-time highs. Throughout our history, our talented global teams have demonstrated a commitment to deliver for all of 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 then leverage these technologies across markets, our ability to help customers meet evolving environmental and operational goals by helping to protect equipment, processes and people and our clear strategic and balanced growth strategy. This is how we have and will continue to win.

In late January, we announced our next President and CEO, Rich Lewis, effective next week on March 2. This transition reflects a long-term succession planning process that comes at a time when we are well positioned for the future, thanks to the talent, dedication and discipline of our global team. Rich has been with Donaldson since 2002 and has been our Chief Operating Officer since August. On behalf of the entire organization, I want to congratulate him, and I look forward to his future success.

Before I turn it over to Rich to discuss our second quarter results in more detail, I want to touch on our recent acquisition of Facet, which we are very excited about. This acquisition complements and expands Donaldson's product portfolio, bringing high-performance fuel and fluid filtration capabilities for mission-critical applications and broadening our exposure to durable end markets such as aerospace and defense and power generation.

Importantly, approximately 70% of Facet's revenue are driven by recurring regulated replacement part sales, a nice fit with our already large composition of replacement parts. Facet makes us stronger, adding nearly $110 million in sales with gross margins and EBITDA margins significantly above our current company average. The company has low capital intensity and strong cash flows. We look forward to welcoming the Facet team to Donaldson and reporting on our combined performance.

Now I will turn it over to Rich, who will talk more about the second quarter highlights, and then Brad will take us through the financials in more detail. Rich?

Thanks, Tod. Good morning, everyone. First, I'd like to thank Tod for his leadership and congratulate him on his successful Donaldson career, including his impact as CEO over the past 11 years. I am honored to step into the CEO role and look forward to working alongside our broader leadership team to build on our momentum and deliver for our stakeholders. I also look forward to my continued partnership with Tod as he transitions to the Executive Chairman position.

Now I'll cover our second quarter results. At a high level, sales were a record $896 million, 3% above prior year with growth across all 3 segments. Currency translation and pricing benefits were partially offset by volume declines in both Mobile and Industrial Solutions. Operating margin was 14%, down from 15.2% a year ago as a result of gross margin pressure. Volume deleveraging, concentrated operational inefficiencies related to our production shifts to support higher demand in power generation and footprint optimization costs negatively impacted gross margin in the quarter. Adjusted earnings per share were $0.83, flat versus the record achieved in 2025.

Now looking at our segments. Mobile Solutions sales were $557 million, up 2% driven by currency benefits. Aftermarket sales were $447 million, up 1% with high single-digit growth in our independent channel, offset by OE channel declines. Overall, we are benefiting from share gains and increases in global vehicle utilization.

On the first-fit side, off-road sales of $86 million increased 8% as we cycle against weak market conditions from prior year, particularly in agriculture. On-Road sales of $23 million decreased 9% and as a result of continued declines in global truck production.

Touching on our Mobile business in China. Sales were up 18% due to strength in off-road and aftermarket. This marks our sixth consecutive quarter of growth in China, and we are optimistic about the future opportunities in this important market.

In Industrial Solutions, sales were $260 million, a 2% increase compared with 2025 driven by currency benefits. IFS sales of $223 million grew 7% from continued strength in power generation, particularly in North America and Europe, and demand for new equipment remains significant. Rounding out our Industrial Solutions performance, Aerospace and Defense sales were $37 million, down 19% versus prior year due to project timing, primarily in defense.

In Life Sciences, sales of $80 million increased 16% year-over-year, largely as a result of robust growth in food and beverage and disk drive. In Food and Beverage, our largest business within Life Sciences, new equipment sales grew substantially in all regions, laying the foundation for future replacement parts sales growth. We continue to win, including in areas such as liquid cooling for data centers, and we are winning with key OEMs and channel partners through our strong sales processes and technology-led products.

Given our second quarter results and our expectations for the second half of the year, we are updating our margin and earnings outlook for fiscal 2026. At the midpoint of our revised guidance ranges, we continue to expect a record year for Donaldson, now inclusive of record sales of $3.8 billion and sales growth in each of our segments, consistent with our previous expectations. Operating margin expansion of 50 basis points to an all-time high of 16.2%, including second half operating margin, consistent with our prior guidance. Earnings per share of $3.97, roughly 8% above prior year, and free cash flow conversion of approximately 90%, which provides us capital allocation optionality to return value to our shareholders.

In summary, I am proud of the agility and resilience displayed by the Donaldson team as we navigate some short-term operational headwinds to set ourselves up for stronger performance over the long term.

With that, I will now turn it over to Brad, who will provide more details on the financials and our outlook for fiscal 2026. Brad?

Thanks, Rich. Good morning, everyone. I want to start by thanking the Donaldson team. They demonstrated tremendous agility as we work to deliver for our customers while making progress on several big projects, including the work done on the Facet acquisition. Facet will be an important addition to our company. We expect to close in the next couple of quarters. And as Todd mentioned, Facet will make us stronger, strategically and financially.

Beyond Facet, we're focused on delivering the strong second half performance reflected in our guidance. But first, a summary of our results. Note that my profit comments exclude the impact from the nonrecurring charges Sarika referenced earlier. Total sales increased 3% and adjusted EPS of $0.83 was flat year-over-year. Operating margin declined 120 basis points to 14% due primarily to the impact from discrete operational issues on gross margin. Second quarter gross margin was 33.7% and down 150 basis points from the prior year and below our expectations. About 60 basis points of the total gross margin decline was due to deleveraging from lower volume in the Mobile and Industrial segments.

We anticipated some year-over-year gross margin pressure in the quarter as there were certain businesses, particularly OE aftermarket and defense with difficult comparisons from last year. But the timing of orders and delivery had a greater impact than planned. For the second half of fiscal '26, we expect the volume pressures abate based on our strong backlogs and the leverage that comes with our typical second half sales step-up.

Second quarter gross margin was also impacted by inefficiencies driven by changes we are making to our manufacturing footprint. One item that spiked this quarter relates to power generation and specifically, the production of our large turbine systems. To meet the super cycle demand and deliver on customer-specific requirements of producing in North America, last year, we began producing these large systems for the first time at one of our facilities in Mexico. The combination of a protracted startup process in Mexico and surging demand resulted in a gross margin headwind of about 40 basis points in the quarter. We have plans in place to accelerate our improvement and expect to make progress in the second half of this fiscal year.

Another area where we expect improvement in the second half relates to our ongoing footprint optimization initiatives. This fiscal year is an important milestone for this work with the most significant projects expected to be completed by fiscal year-end. In the quarter, we had about 30 basis points of gross margin pressure as we go through the final stages of a plant closure in the U.S. and associated transfer of production. Once through this heavy lift period, we will begin to realize cost benefits later in this fiscal year and into the future.

While gross margin in the second quarter was not to our expectation, the drivers of the performance reflects short-term headwinds from the work we are doing to establish long-term efficiencies in several of our most important businesses. Our forecast contemplates sequential improvement in gross margin and full year expansion. I'm confident we will deliver on that target.

At the same time, our team continues to do an excellent job managing our operating expenses. As a rate of sales, operating expenses improved to 19.7% from 20% a year ago, reflecting benefits from the structural cost optimization initiatives launched during the prior fiscal year as well as continued expense discipline. We are prioritizing opportunities while conserving where we can, providing necessary offsets to the footprint work we are doing.

In terms of segment profitability, Mobile Solutions pretax profit margin was 16.8%, down 60 basis points from prior year, primarily due to volume deleveraging in the aftermarket OE channel and footprint optimization efforts. Industrial Solutions pretax margin was 11.9%, down from 16.1% in 2025, stemming from the previously mentioned operational inefficiencies and footprint optimization costs. With improving plant efficiency and benefits from leverage on higher sales, we expect Industrial pretax operating margin to step up notably in the second half.

Life Sciences pretax margin improved to 9.3% from a loss of about 1% a year ago. Strong sales in our higher-margin food and beverage and disk drive businesses and benefits from a more focused expense structure following optimization programs a year ago, drove the improvement.

Turning to our fiscal '206 outlook. First on sales, we are reaffirming our consolidated sales guidance of 1% to 5% growth, with stronger-than-expected sales in Mobile Solutions and Life Sciences being offset by lower Industrial Solutions sales. Our forecast assumes pricing and currency translation will each contribute about 1% to growth.

Within Mobile Solutions, we're increasing our growth forecast to a range between 2% and 6% and compared with flat to up 4% previously, primarily due to favorable currency. We are raising our guidance for aftermarket and now expect sales up mid-single digits versus our previous low single-digit forecast, primarily due to strength in our independent channel from currency, pricing and volume. Consistent with our prior guidance, off-road sales remain on track to grow mid-single digits, mainly due to a modest rebound following significant declines in agriculture a year ago. On-Road sales are expected to be flat for the year, also in line with our prior guidance due to muted global truck production.

In Industrial Solutions, sales are forecast between a decline of 1% and an increase of 3% versus the previous expectation for growth between 2% and 6%. Sales of IFS are now expected to grow in the low single digits, down from mid-single digits previously, due largely to declines in sales of dust collection and industrial hydraulics systems. Aerospace and defense sales are projected to decline mid-single digits versus flat previously due to the timing of certain programs.

In Life Sciences, we are increasing our sales forecast as benefits from favorable currency translation are expected to complement already strong food and beverage and disk drive momentum. To that end, we project sales to increase between 5% and 9% versus a 1% to 5% increase previously. We expect benefits from sales leverage and continued cost discipline to generate full year pretax margin in the mid- to high single digits, up from mid-single digits previously.

Given our second quarter performance and our outlook for the balance of the year, we revised our operating margin guidance to a range between 16% and 16.4%, a decline of 30 basis points at the midpoint from our prior forecast. Despite the temporary gross margin headwinds in second quarter, the full year operating margin forecast still reflects a record level and at the midpoint, an incremental margin approaching 35%. With that change, we now expect fiscal 2026 EPS between $3.93 and $4.01 per share. At the midpoint of $3.97, we are projecting EPS growth of 8% on 3% sales growth.

Our earnings guidance contemplates a second half step-up in sales supported by our strong backlogs as well as gross margin expansion resulting from the operating improvements I discussed earlier.

Now on to our balance sheet and cash flow outlook. Our capital expenditures are expected to be between $60 million and $75 million with focused investments, including new products and technologies across all verticals. We continue to project cash conversion in the range of 85% to 95%, an improvement versus 2025 and consistent with historical averages. The balance sheet remains a strength of Donaldson with our net leverage ratio currently at 0.7x. Adjusting for the Facet acquisition, Donaldson would have a net leverage ratio of approximately 1.7x, still leaving us ample financial flexibility to thoughtfully invest for our future growth.

As we think about shareholder value creation for the long term, our capital allocation priorities are unchanged. First, reinvest back into the company. We are the leader in technology-led filtration and intend on maintaining our position. R&D investments in strategically important high-growth, high-margin areas where we have a clear path to win will drive our success. Our longer-term efforts are also supported by ongoing working capital investments and capital expenditures.

Our second capital deployment priority is disciplined M&A. We actively work through a pipeline of opportunities. Discipline is key to our approach. We are excited about our Facet acquisition and look forward to pursuing additional opportunities that meet our strategic and financial criteria. We are creating long-term value through our growth investments, but also through the return of cash to our shareholders.

Our third capital allocation priority is dividends. calendar year 2025 was our 70th year in a row of paying dividends and the 30th in a row of increasing our dividend. We have every intention of maintaining our status as a proud member of the S&P High-Yield Dividend Aristocrat Index.

Share repurchase is our fourth capital deployment priority and it has always been the variable component. Given the pending close on our acquisition of facet, we do not expect to repurchase additional shares in the balance of this fiscal year. Year-to-date, we have repurchased 1.2%, which offsets dilution. And our focus now is using the strength of our business to rapidly pay down debt. Looking beyond the quarter, the underlying fundamentals of our business are strong, and we have the right priorities to deliver another year of profitable growth and value creation.

Now I'll turn the call back to Tod.

Thanks, Brad. As I sit and reflect today, I am particularly pleased with Donaldson Company's continued evolution as a premier global provider of technology-led filtration solutions, and I'm excited for the opportunities that lie ahead. It has been a privilege to be part of this organization for the last 30 years and an honor to have led the company for the last 11. I'll not be far away as I take on the role of Executive Chairman. I am highly confident in our teams around the globe who make Donaldson what it is and who will reach new heights under Rich's leadership.

With that, I'll now turn the call back to the operator to open the line for questions.

[Operator Instructions] Your first question comes from the line of Angel Castillo with Morgan Stanley.

This is Oliver on for Angel today. Can I just double click on A&D. I know you guys guided down here for '26. Is that because of projects shifting into 2027 or something to do with underlying demand? And then how should we think about your guide versus what you're seeing for Facet? Is that just product of different portfolios and aftermarket?

Oliver, this is Rich. Yes. Let's -- I'll take your first question. So when you think about A&D, we're coming off record sales levels the last couple of years. And clearly, we've had suppressed revenue in the first half of the year. It's really a combination of 2 things. So we've got some timing issues on some of our military projects. These can be lumpy. We also have supply chain challenges as well that are ongoing. I would say that overall, we're very comfortable with the order intake. If you think about the backlog of this business sort of post October, it's up over 20%.

So orders are coming in nicely. We feel really good that the second half run rate is going to be significantly improved. The name of the game is really going to be working with our suppliers and making sure we can ship all the orders. Some of these suppliers are single-sourced directed buys. We are trying to qualify new suppliers. These projects can take quite some time. But overall, it's really about muscling through this order book. So we'll see a significant step-up in the second half.

And then as far as Facet goes, we do play in different parts of the market, and they're exposed to different types of -- they're more military fixed-wing. There are also a lot of marine we tend to be more ground vehicle. And so we play in different parts of the market, but we'll start to see improved performance in the second half on the revenue.

Great. That's really helpful. And then just maybe one follow-up on Industrial. I know some footprint changes this quarter. Do you kind of expect that to continue or abate somewhat into fiscal 3Q and 4Q? And then can you talk just a little bit about what that buys you in terms of power gen, does that potentially expand throughput or potentially even a bigger portfolio there? So any color there would be helpful.

Sure. Yes, let's take the footprint optimization work. I know we've been talking about this for a while. These projects are pretty complex. They typically last 12 to 24 months. We have had an accelerated amount of activity in this space over the last couple of years. Just to put it into perspective, we have 4 plant closures that we've been working on, none of which touch power gen. It's other parts of the industrial business. Two of these are in their final phase, which basically means the plants are closed. The assets have been transferred to the new location, and they're working through the learning curve and the productivity increase. We would expect that work to come to a conclusion through the balance of the fiscal year.

We also have 2 other ones. We will close those plants in quarter 3. And they'll be working through the learning curve and the productivity increase in Q4. Maybe a way to think about it is you'll start to see the benefit, the margin improvement benefit in our guide in F'27. We also do these projects for a couple of reasons. We're trying to reduce our asset base, and we're also trying to reduce or improve our risk profile. So we believe these projects ultimately will be very successful, but we do have a few more months here of work ahead of us.

Your next question comes from the line of Bryan Blair with Oppenheimer. .

Tod, congratulations on a very successful career, including over a decade as CEO. And Rich, congrats on [indiscernible].

Thanks, Bryan.

Thanks, Bryan.

Of course. I was hoping that you guys could offer a little more color on how ISS orders trended through fiscal Q2 and then what your team is seeing thus far in Q3, year-on-year growth was stronger sequentially aligning with the prior guidance framework of mid-single-digit growth. Power gen, some inefficiencies in the second quarter, but certainly a good guy in terms of growth path. Brad, I know you called out dust collection and hydraulic systems as the areas of relative weakness. I guess if you offer some finer points on whether there is accelerated weakness through fiscal Q2 into Q3 in those areas, or you're simply taking a more cautious or conservative stance on continued macro uncertainty?

Yes. So maybe I'll take the business side, the macro and then if Brad wants to add anything on the numbers, way in as well. So if we sort of disaggregate IFS, you mentioned that Power Gen is clearly very, very strong right now. Just at a big picture, we're booked through the end of the fiscal and we've loaded fairly solid bookings already into the next 2 fiscal years. So we're feeling really good about the demand on Power Gen. And it's pretty broad-based. We're seeing it across sort of the compressed gas side, on the oil and gas piece and on peak and base load energy generation. A lot of that's tied to the data center push that's going on.

On the IFS side, yes, we're seeing -- it's a bit mixed. Globally, we see relatively decent order patterns outside of the Americas. The Americas have been pretty soft. And we're still seeing a fair bit of quoting activity in the Americas. I think the uncertainty in the economy is driving people to be cautious on pulling the trigger on [indiscernible]. On the -- I would say, across the board, if you look at replacement parts, those continue to perform very well. we see good utilization rates and good order intake on the replacement side.

Bryan, this is Brad then. I'll just add. I think as you look at the first couple of quarters, dust collection is about where it was in the second quarter in terms of the overall year-over-year conditions. So not much to comment there, but I do want to underscore a point Richmond this is really about our new systems and the first-fit side of the business. The machines are still running. Aftermarket is still doing well in IFS, and we've got good opportunities there with our placement. It's just about getting these capital expenditure decisions of our customers to break free a little bit.

Understood. That's helpful color. Facet is an intriguing deal for your team certainly mix enhancing. Can you speak to the historical growth rates of the asset, whether we should expect accelerated growth under Donaldson ownership? If so, what the drivers are there? And then how we should think about P&L impact looking to fiscal '27? I know you had said closed within the next couple of quarters, so sometime in the fiscal back half. But if we look to next year, how should we think about the impact?

Yes. Maybe just -- I'll just take a step back if it's okay and just talk a little bit about Facet from a broader perspective. I mean we're really excited about Facet potentially join the Donaldson family. Obviously, we'll continue to work through the regulatory process to close this deal in the next couple of quarters. But this is a business that we've been following and frankly, admiring for a long time. It's a perfect fit for what we're trying to do on an M&A side. So it's high-level recurring filtration revenue. They've got a durable competitive advantage given the sort of the regulatory nature of their end market, and it sits in a high-margin, high-growth business. We'll talk about the growth rates here in a second. And as we've gotten to know the team there, we think it's also a very good fit culturally, really good folks, very committed to their customers a deep, deep knowledge.

Now the growth rates, so as we put in the deck that we posted out on our website, yes, they're high single digits, and it's a mix of volume and pricing. And we would expect that to continue. They have a lot of potential growth opportunities outside of their core military and commercial markets on the aerospace side. And those are a lot of markets that we play well in on our industrial. So we hope over time that we'll find significant growth synergies. We have not baked that into our expectations. That's all upside. But yes, it's going to be a good fit for us, and we're really excited about it.

Bryan, on the P&L side then, Obviously, we expect to close in a couple of quarters. So nothing factored into the fiscal '26 guidance that you mentioned fiscal '27. As we think ahead, I think the important point that we said in the prepared remarks is that it's mix positive on our most important operating metrics. Gross margin and Obviously, this is a business then that will work to integrate properly. We don't expect much in the way of cost synergies, a few million dollars, but more from procurement because it sits in a unique spot relative to where we sit in these markets. So I think overall, we'll give more detail with fiscal '27 guidance, but we're excited about this from the strategic side that Rich mentioned and the financial implications to Donaldson.

Your next question comes from the line of Tim Thein with Raymond James.

Congrats again to both Rich and Todd. And Todd, I'm hopeful that you're able to observe its turnaround and go for basketball and retirement.

Thanks, Tim.

Yes, only one way to go. The question is on the mobile business. And just in terms of the -- based on the full year guide, it implies that the growth in that line picks up a little bit in the second half. Maybe you can just talk about -- you mentioned the strength -- continued strength in the independent channel, just maybe what your you're seeing and hearing from the OEM dealers. And then looking out a bit, how do you expect that eventually? That's the first-fit business, hopefully rebounds. How would you expect kind of the interplay between those 2? Maybe just what you've observed historically when you start to see the first fit side begin to pick up. That's the first question.

Thanks, Tim. Maybe let me break this down. Let's talk about the replacement parts side for a second. So as you pointed out, the releasement part orders through our independent channel have been very strong. We still continue to see that performance continuing. No slowdown there at all. When we think about the OE side, this year, we returned to, what I would call, a sort of typical normal year-end, their fiscal year-end inventory management practices. So we did see a pretty good pull back relative to the prior year where we actually saw people stocking up, which was pretty atypical. So year-over-year, it was a pretty drastic change.

What we always look for is when you come out of those holidays, what happens with your backlogs, and we saw a sharp increase, unlike our independent aftermarket, which is really you get orders, you ship them within 24 hours, our OE partners do give us really good visibility on lead times. And we've seen a sharp increase in our hard backlogs on the OE. So we're really confident the second half will be a significant improvement there.

Maybe touching on the first-fit markets. If you think about ag and truck, they still continue to be performing near, what we would call, bottom of the cycle. We're monitoring this closely because when these markets come back, and hopefully, this answer your question, they come back aggressively. I think 20% to 30%. And we want to be really ready to make sure we address our customers' needs. So we're staying very tight with our customers on that. I will say we're seeing signs of pockets or optimism and ag with some increased order intake on the first-fit side with select OEs, but it's not broad-based at this point.

Also, in the truck market, we're having signals from some of our truck manufacturers that in the second half of calendar year '26, so which would be our fiscal year '27, they're planning for increased truck builds. I would say we remain cautious on this and being ready for the upturn because when it does happen, it happens aggressively. But that's how we characterize the markets as we sit here today.

Yes. That's great. That's super helpful. And then maybe, I don't know, Brad, just how to think about the it's kind of a multipronged answer. But just as that growth, again, if you kind of outlined if and when that begins to come in, how to think about just the mix impact on margins in that segment? Again, I'm sure there's multiple variables that go into that. But any help you can give on that in terms of how we should be thinking about the incrementals as that mix eventually kind of normalizes?

Sure. Well, you hit the main point. It is multivariable, but there's a mix impact as we sell more to the OEs and especially on the new equipment as that comes back. But honestly, that's something to Rich's point that we're getting ready for. And while we may have a little bit of a rate mix impact that we talk about in future quarters, the earnings will flow to the bottom line from that. And I think we'll get very nice leverage on it as it moves through the P&L.

And then the other side, and I just want to -- it's a modest tangent to your question, but to the point Rich made and about these markets, I think we will also see some bounce back in the Mobile Solutions segment in the quarter. There was a part of my script where I talked about the volume deleveraging. This will bounce back. So when we think specifically about the second half of the year, we would expect Mobile Solutions profit acceleration from here as the volume starts to come in as well.

Your next question comes from the line of Adam Farley with Stifel.

Bradley, can we go back to the operating efficiencies and power generation? I just wanted to put a finer point on what exactly happened there? What was the underlying cause. And then just expectations on how that kind of ramps going forward?

Yes. So I gave you the macro perspective on Power Gen. So clearly, the demand is very strong. We're in the middle of sort of rebalancing our product portfolio across both sites so we can maximize output. So we've moved production into our facility in Monterrey, Mexico. We've ramped that facility's capacity up significantly through a combination of process improvements to increase flow and a dramatic increase in staffing. And so we're working through the learning curve and onboarding these employees. A lot of the hiring is behind us, and now it's really about training and onboarding these employees in the third quarter here. We do expect output from this site to continue to improve with this increased capacity and their productivity will continue to get better throughout the fiscal year.

And then maybe one more on the pending acquisition of Facet. Could you maybe talk about the total addressable market for Facet, Facet's market position and maybe primary competitors in the space?

Yes. So from a competitor standpoint, they're one of the leaders. There's a couple historic players that lead in this space. And then it fragments from there. They play in a lot of different markets. And so they're in the commercial, the marine and military space. We believe there's a lot of headroom for continued growth. And some of the interesting opportunities are actually in what I would consider maybe our core industrial markets, which would be relatively new to them. And so yes, there's a lot of space for us to grow this business over the coming years.

Your next question comes from the line of Brian Drab with William Blair.

Congratulations, Todd and Rich. I'll follow up more with both of you later and save the sentimental stuff for the nonpublic call. Some of the strongest growth lately has been coming from the Life Sciences segment, of course. And I was wondering if you could just talk a little bit about that disk drive business. I know you've talked about the HAMR technology in the past that's driving incremental demand for your products. What is the -- even though the growth is so strong lately, I'm wondering, could that accelerate? Could that business be much bigger? And how tied are you to the data center build-out? And can you just talk a little bit about the business who your customers are and what the TAM is for you in that space?

Yes. Brian, as you point out, the Life Science business has been doing very well. We restructured that business last year to bring more focus. And the 2 largest businesses, food and bev and disk drive have been really excelling.

On the disk drive side, if you think about what's driving a lot of that demand, it is AI and cloud storage. There's a strong demand for drives in more and more dense storage. HAMR clearly addresses that. I would say our growth is a combination of market comeback and share gains. And we do believe that the market has runway to grow. A lot of our customers are building at very high utilization rates right now. And so as they bring on more capacity the demand feels like it's there for the foreseeable future. So HAMR has been a big success so far. We've ramped that business up with one of our OE customers this year, and we look forward to that continuing to gain market penetration.

And your technology or products that you're -- that's used in that application is what exactly? Can you just remind me?

Yes. So it's a filter in the early days. It was a filter to remove particles much like some of the air filters. But as these drives have become way more sophisticated, now we're doing absorption technologies that really take out harmful gases and fumes. These drives are very, very, very sensitive. And that's part of our share gain in this space as the technology continue to increase we were able to continue to differentiate our capabilities and take additional market share there.

And then is there any detail that you can give on your liquid cooling exposure? I know you mentioned it today on the call again, but what products, technologies are you supplying there? And what's the potential addressable market for Donaldson from there?

Yes. So on the liquid cooling, it's really an extension of the products that we sell in the food and bev. Their products have applicability in several other process filtration applications. And this is one. We've seen a sharp uptick in interest. A lot of these data centers are converting from air cooling to liquid cooling. And our products fit very nicely with that. it's a pretty fragmented market right now because there's really no clear standards on the systems. And so I'd say it's a bit early to judge how big it's going to be. But certainly, we're seeing a lot of activity and a lot of interest in that space.

Your next question comes from the line of Laurence Alexander with Jefferies.

Just two quick ones. First, on the Power Gen side, can you give some perspective on how you think the competitive market has changed, the competitive landscape has changed since the last cycle? And do you -- how much more capacity expansion do you think you would need to do to keep up with the order books that have been announced by the equipment makers?

And secondly, on the acquisition, what's your time frame for the acquisition to get to an acceptable return on capital?

So I'll take the Power Gen, and then I'll let Brad address the second question. So from a Power Gen perspective, yes, I mean the demand is very, very high. I would say the dynamic that's different now is because, as you're aware, we sort of narrowed our focus after the last cycle. We're seeing, I would say, more interest in being fair and balanced with the commercial deals. And so we'll continue to take orders that make sense for us commercially. We're increasing our capacity in our Mexico facility fairly significantly. And so we believe we're in a good position from addressing our customers' needs. They have many other constraints besides our product. And so it feels like we're well aligned with what their build capability is right now.

Laurence, this is Brad. In terms of the returns, this is much more of a strategic acquisition than a synergy play. And with that, thinking about it on a cash basis, probably more at our cost of capital in the 5-year time horizon. But I think the really positive side of this business is it's throwing off cash immediately. We get to earnings accretion pretty rapidly. We said year 2. And of course, our goal is to make that even faster.

Your next question comes from the line of Rob Mason with Baird.

And Todd, Rich, I'll offer my congrats on passing the baton there as well. Rich, I think in your comments earlier, you talked about the second half margin outlook had not really changed in the updated guidance. But it does sound like there's more work to do on the footprint optimization effort to -- just kind of give us a feel for the confidence level around the ability to ramp margins whether that means the third quarter margin step up more meaningfully or if that happens more in the fourth and just -- yes, again, just kind of the confidence level to keep that margin -- second half margin outlook intact, just given the second quarter challenges.

Yes, I think -- I mean you hit on it, Rob. Clearly, we need to see the volume come back in our OE and Aerospace and Defense businesses. We have those backlogs. So we feel really confident on that part. We'll have to continue to fight through the supply chain issues on the A&D, but the team is really focused on that, and they're working hand in hand with our suppliers. So that part of it, we feel pretty strongly that we're in a good position.

The restructuring work, as I mentioned, a couple of these are done. And so we should start to see the costs go down and some of the benefits start to feather in. The other 2 are still ongoing in Q3. Probably the risk there is if there is a delay or there's any unexpected problems. But right now, we're on track. And certainly, we would expect to have those finished up here by the end of the fiscal for sure.

And then Power Gen, as we mentioned, we've doubled the workforce down there just in our first quarter. And so we feel good. The turnover is low. The staffing is starting to become productive. So we need to see continued progress on that in the second half. But based on all the observations and with the team, we're well on track for them to continue to accelerate improvement through the second half of the year.

Rob, I'm going to add 1 point, too. And I think an important note here is as we look at the second half step up, some of that comes with expense leverage as well. We've got really good controls over what's going on with expenses in the company. When you think about the improvement in the second half, a big portion of that also comes from the natural leverage. So as Rich said, we've got the backlog to deliver the sales. We'll keep expenses at a rate that's, give or take, are at a dollar level. It's, give or take, where we were in the first half. So there's the leverage that comes with that, too.

Okay. Very good. That was actually my next question. Just the jumping off point there, given second quarter OpEx anyway step down sequentially. Maybe just last question. Just thought process, again, a smaller business, I understand on the first-fit side. We're certainly aware of the on-road, the truck challenges. But this -- it does to reach flat for the year, does kind of infer that you see some recovery in that business? I mean should we just be putting all that recovery in the fourth quarter? When I say recovery, sequentially in the fourth quarter?

Yes. I think the move towards the second half and late in the second half is it. I will -- I mean, of course, Rich said this earlier about the trough. We're seeing some green shoots out there. I think the public data sources that many of us follow suggest even an increase in truck production, in Class 8 heavy-duty in North America this year. So there are some things that give us encouragement. On top of it, we talked last quarter about some of the moves of programs within this business that we've won. I think that's an important part of our first business is. We're still gaining share with the OEs. So to the extent that production comes back, that's just incremental growth for us.

And that concludes our question-and-answer session. And I will now turn the conference back over to Rich Lewis for closing comments.

That concludes our call today. Thanks to everyone who participated. We look forward to reporting our third quarter fiscal 2026 results in June. Goodbye.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.

Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Donaldson Company Q1 FY '26 Earnings Webcast. [Operator Instructions] I would now like to turn the call over to Sarika Dhadwal Doba, Head of Investor Relations. Sarika, please go ahead.

Good morning. Thank you for joining Donaldson's First Quarter Fiscal 2026 Earnings Conference Call. With me today are Tod Carpenter, Chairman, President and CEO; Brad Pogalz, Chief Financial Officer; and Rich Lewis, Chief Operating Officer. This morning, Tod and Brad will provide a summary of our first quarter performance and our outlook for fiscal 2026.

During today's call, we will discuss non-GAAP or adjusted results. First quarter 2026 non-GAAP results exclude a pretax gain on the sale of fixed assets of $9.3 million and a pretax charge of $5 million for restructuring and other charges primarily related to footprint optimization and cost reduction initiatives. A reconciliation of GAAP to non-GAAP metrics is provided within the schedules attached to this morning's press release.

Additionally, please keep in mind that any forward-looking statements made during this call are subject to risks and uncertainties, which are described in our press release and SEC filings. With that, I will now turn the call over to Tod.

Thanks, Sarika. Good morning, everyone. Donaldson Company's first quarter results were strong, and I'm proud of what our team was able to accomplish, growing sales, operating profit margin and earnings. We delivered once again on our commitments to all of our stakeholders, our customers, our shareholders and our employees.

We did this through our leadership position in filtration which was built on decades of solving our customers' most difficult filtration problems with our razor to sell razor blades model, our best-in-class technology, which is uniquely powerful because we focus on filtration capabilities and then leverage these technologies across markets.

Our ability to help customers meet evolving environmental and operational goals by helping to protect the equipment and maintain cleaner work environments and our clear strategic and balanced growth strategy. That is why our success continues. I will start by discussing our first quarter performance, touch briefly on our expectations for fiscal 2026.

Then Brad will detail our financials. Lastly, I'll provide some closing remarks before opening the call to questions. In the first quarter, we grew sales to an all-time first quarter high of $935 million, a 4% year-over-year increase with growth across many key businesses, including mobile aftermarket, power generation, food and beverage and disk drive, expanded operating profit margin to a record 15.5%, driven by leverage on higher sales and cost optimization initiatives, delivered record earnings per share of $0.94, 13% above prior year, returned $127 million to shareholders through share repurchase and dividends and continued cost optimization initiatives including our footprint optimization, laying the foundation for higher future profitability.

Now a few highlights by segment. In Mobile Solutions, our razor to sell razor blades model continues to drive through cycle performance. Our aftermarket results are robust. For example, we continue to gain share in the independent channel where sales grew nearly double digits. We have expanded partnerships with customers like NAPA.

Our distribution centers are performing well, stock availability is at desired levels and our on-time delivery rates are high. While cyclical headwinds continue, our largest first-fit business, off-road grew for the second consecutive quarter with supportive end market conditions in construction more than offsetting muted conditions in agriculture.

In Industrial Solutions, our power generation business is robust, supported by the current electricity demand super cycle, including data center and AI infrastructure build outs. Our power generation order books are full through the rest of this fiscal year. Dust collection replacement parts sales growth was solid, another example of our razor to sell razor blade strategy at work as we continue to build out our service and aftermarket capabilities.

To that end, this quarter, over half of our total industrial sales were replacement part sales. In Life Sciences, we're excited by the market share we are gaining in food and beverage where sales grew over 20%. We are winning with key OEMs and channel partners growing first-fit sales and planting seeds for future replacement part sales.

Our disk drive business also grew over 20% through share gains and supportive market conditions, and we are investing in new technologies to support capabilities for HAMR pronounced HAMR short for heat-assisted magnetic recording, which will contribute to future growth. Our strong overall results are a testament to the capabilities and agility of the Donaldson team. Our global operations teams, in particular, continued to deliver for our customers through the changing tariff landscape and with a keen focus on efficiency.

Our global region for region footprint is a strong asset for the company and one of our key competitive advantages. Leveraging this decades-long foundation, we have successfully offset residual tariff impacts through pricing and optimized supply chain. I am proud of how we are also stepping up and helping our customers mitigate tariff impacts through collaboration, education and production transfers.

To that end, our current annualized estimate for the impact of tariffs is approximately $25 million, down from $35 million previously. We are also building long-term structural efficiencies through our footprint and cost optimization initiatives. We expect to be mostly complete with our current activities by the second half of this fiscal year. Our commitment to serving our customers through any market conditions while maintaining high on-time delivery rates is driving demand, and our backlogs are reflective of the confidence our customers have in Donaldson.

We are also building for our future through our disciplined investments in R&D and capital expenditures. This quarter, these included continued focused investments in growth areas such as solvent recovery new disk drive technologies and air and alternative fuel filtration. Now I'll provide some detail on first quarter sales. Mobile Solutions total sales were $598 million, 5% above prior year.

Aftermarket sales were $480 million, up 7%, driven by strength in both the OE and independent channel. On the first-fit side, off-road sales of $95 million increased 6%, Gains in construction offset continued weakness in agriculture. On-Road sales of $23 million declined 27% as a result of decreased global truck production. Within Mobile Solutions, our China business was solid with overall sales up 15% from strength in off-road and aftermarket.

This marks the fifth consecutive quarter of growth and we recently won another hydraulics program with a top agriculture equipment manufacturer, another sign that customer trust in Donaldson is building in this massive market. Now on to Industrial Solutions. Industrial sales were $258 million, flat to prior year. Industrial Filtration Solutions, or IFS, sales of $216 million grew 2% from continued strength in power generation, particularly in Europe and thus collection.

In Life Sciences, sales of $79 million grew 13% year-over-year as a result of double-digit growth in food and beverage and disk drive bolstered by project timing in our upstream biotechnology businesses. Given our robust start to the year and our confidence in delivering on our financial and strategic objectives through the balance of the year, we are increasing our operating margin and EPS outlook. At the midpoint of our updated guidance ranges, we expect record sales of $3.8 billion and sales growth in each of our segments, operating margin expansion of 80 basis points to a record of 16.5%, which puts our incremental margin above 40%, and all-time high earnings per share of $4.03.

With that, I will now turn it over to Brad, who will provide more details on the financials and our outlook for fiscal 2026. Brad?

Thanks, Tod. Good morning, everyone. Before getting into the financials, I want to thank the Donaldson team for producing strong first quarter results, giving us confidence in our ability to deliver on our increased profit guidance for the full year. The team continues to display their talent and focus quarter after quarter, and we're excited to build on our momentum.

I want to start this morning with a few highlights. Note that my profit comments exclude the impact from the nonrecurring net gain that Sarika referenced earlier. Total sales increased 4%. Operating margin was a first quarter record of 15.5% up 60 basis points over prior year with an incremental margin over 30%.

Adjusted EPS was $0.94, up 13%. And cash conversion was strong at 101% due to improved working capital management, altogether, a solid quarter for Donaldson Company. Digging deeper into the P&L, our strong first quarter operating margin was driven by expense favorability. Operating expense as a rate of sales improved to 19.9% from 20.7% a year ago, reflecting leverage on higher sales that was compounded by benefits from the structural cost optimization initiatives launched during the prior fiscal year.

Gross margin was 35.4%, down 20 basis points from the prior year and slightly better than our internal expectations. We partially offset increased operating costs with pricing, including pricing related to tariffs as we are successfully mitigating that impact. We still expect gross margin expansion for the full year with most of the favorability in the second half as our footprint optimization projects come to completion, and we benefit from volume leverage that accompanies our typical seasonality.

In terms of segment profitability, Mobile Solutions pretax profit margin was 18.6% up 30 basis points from prior year due to mix benefits from higher aftermarket sales and leverage on higher sales. Industrial Solutions pretax margin was 12.5% down from 15.9% in 2025 due to an unfavorable sales mix and loss of leverage and operating costs. We expect segment profitability to increase through the balance of the year as sales leverage translates into gross margin and expense rate improvements.

Life Sciences pretax margin improved notably to 9.2% from a loss of 7.6% a year ago. Strong sales in our higher-margin food and beverage and disk drive businesses combined with benefits from last year's optimization programs drove the improvement. A quick comment on last year's optimization efforts. We initiated the first and most substantial round of restructuring and life sciences late in the first quarter and then performed additional rounds over the course of fiscal '25.

Given that cadence, the year-over-year improvement we just recognized in first quarter is at a much higher level than what we expect in future quarters over the balance of this fiscal year. Turning to our fiscal '26 outlook. First, on sales. We are reiterating our sales guidance for every business except on road within Mobile Solutions. This business represents less than 3% of total company sales. Consequently, the change to the on-road forecast does not have a meaningful impact on our growth expectations for the total company or Mobile Solutions.

We still expect total company sales to increase between 1% and 5%, including pricing of about 1% and Mobile Solutions sales are expected to be flat to up 4%. Within Mobile Solutions, on-road sales are now expected to be flat versus 2025. This compares to our previous estimate of high single-digit growth and the change is driven by the timing of a few key projects that were pushed out beyond this fiscal year.

Off-Road sales are forecast to be up mid-single digits due in large part to easier comparisons from sharp declines in agriculture a year ago. We continue to see that end market at trough or near trough levels. Aftermarket sales are projected to grow low single digits due to market share gains and vehicle utilization rates. In Industrial Solutions, sales are forecast to grow between 2% and 6%, and with a mid-single-digit increase in IFS, where sales are expected to grow across all businesses, including in strategically important areas such as aftermarket enabled by services and connectivity.

Aerospace and defense sales are projected to be flat after cycling against record levels in the prior year. This forecast also reflects a rebound from the decline in first quarter as the timing of orders can be lumpy in this business. In Life Sciences, we expect sales growth between 1% and 5% with continued momentum in Food and Beverage and disk drive through benefits from sales leverage and our improved cost structure, we anticipate full year Life Sciences profit margin to be mid-single digits.

One side note to help with calendarization of this profit. We expect life sciences will be profitable in every quarter but at a lower level than first quarter, which benefited from leverage that was due in part to the timing of project sales in our acquired businesses, which we anticipated later in this year. Overall, we're pleased with our profitability expansion in this segment.

Given our first quarter performance and our outlook for the balance of the year, we are increasing our full year operating margin guidance by 10 basis points to between 16.2% and 16.8%. This includes year-over-year sales growth in all 3 segments, gross margin expansion and expense leverage. The midpoint of our guidance range implies an incremental margin of more than 40%.

With that, we are also increasing our fiscal 2026 EPS guidance by $0.03 to $3.95 a share to $4.11 per share or $4.03 at the midpoint. To help with modeling for the rest of the year, I would like to make a few points on calendarization. As is typical, our sales are weighted towards the back half of the year, representing about 52% of full year sales due to seasonal dynamics such as holiday timing in the second quarter and peak activity in our end markets in the back half of the year.

Operating profit is even more heavily skewed towards the back half, with about 55% of full year profit being generated between February and July. We'll benefit from higher leverage on the normal step-up in second half sales volume, and we also expect abating headwinds from footprint optimization initiatives as those projects complete. Now on to our balance sheet and cash flow outlook.

We project cash conversion to be in the range of 85% to 95%, an improvement versus 2025 and consistent with historical averages. Combined with our supportive balance sheet and low net leverage ratio, which currently sits at 0.7x, Donaldson has the financial flexibility to thoughtfully invest for our future growth. Our strategic capital allocation priorities are unchanged.

First, reinvest back into the company. We are the leader in technology-led filtration and are committed to maintaining our position. We continue to make R&D investments in strategically important high-growth, high-margin areas. And we also invest in our supply chain and working capital to ensure best-in-class delivery for our customers, which is part of the value we provide. Our longer-term efforts are also supported by capital expenditures, which include investments in new products and technologies across all of our segments.

Our second capital deployment priority is disciplined M&A. We are actively working through a pipeline of opportunities, and discipline is key to our approach as we pursue opportunities that meet our strategic and financial criteria. The value we create comes through reinvestment and also through the return of cash to our shareholders. As such, our third capital allocation priorities dividends.

Speaking to our long-standing commitment to our shareholders, this calendar year is our 70th in a row of paying dividends and the 30th in a row of increasing our dividend, maintaining our status as a proud member of the S&P High Yield Dividend Aristocrat Index. Our fourth priority is share repurchase.

For fiscal 2026, we're forecasting a repurchase of 2% to 3% of shares outstanding, which more than offsets dilution and is in line with our historic levels. To summarize, we are growing Donaldson Company and growing profitably. Taking the midpoints of our top and bottom line guidance ranges, we're projecting 10% earnings growth on 3% sales growth, with incremental operating margin leverage of more than 40%.

We have the balance sheet to invest in growth and we'll do that responsibly. We started the year strong, and I expect to maintain that momentum well beyond fiscal '26. Now I'll turn the call back to Tod.

Thanks, Brad. As we turn the page to our second quarter, Donaldson is in a position of strength. We are maintaining our focus on doing what we do best, solving our customers' complex filtration challenges through our technology-led products and services.

With this focus and through our execution, key investments and strategic initiatives, I am confident in our ability to create value for all of our stakeholders in the future, and we look forward to reporting on our ongoing progress. To close, I want to thank our talented employees around the globe who each day are building our future success. With that, I will now turn the call back to the operator to open the line for questions.

[Operator Instructions] Your first question comes from the line of Bryan Blair with Oppenheimer.

Sorry if I missed the detail. What was IFS first-fit and aftermarket revenue in fiscal Q1? And then how should we think about first and after market contribution to mid-single-digit full year growth? And on the aftermarket side, is it still your expectation to increase connected machines by over 30% this year?

Bryan, this is Brad. I'll start with the numbers. In IFS, both first-fit and replacement were up. We didn't go into the details on it. I think notably, power generation continues to do very well for us in terms of the projects and a lot of power needs for data center build-outs. So that business continues to do very well, and that's on the new projects and then a little more tepid elsewhere.

And relative to -- this is Tod. And relative to connected solutions, we continue to do well and execute the strategy very well. We do expect to connect between 2,000 and 3,000 dust collectors this year, and we continue to be on target.

Okay. That's great to hear. And then you would emphasize a little more so last quarter that the team remains in the heavy lift phase of footprint optimization. That being said, are you willing to speak to what structural benefits have been realized to date. And what we should anticipate in terms of pending efficiencies, cost savings, et cetera, as the initiatives conclude the back half of this year into early next year?

Sure. This is Brad again, Bryan. In terms of structural efficiencies to date, very limited. I think if you look at this morning's report, one notable thing is a gain on sale of $9 million. So we've been moving a lot of product out of facilities. This was related to a plant in the U.K. that's completed now.

So there's 2 aspects of this work and the heavy lift has been that kind of final wrap-up. And then the next tranche of work is going to be, I'd call it, start-up in the new home of this production. So as we ramp up there, it's going to be, teams getting used to this new delivery, new products. And that will happen over the course of this fiscal year, but that's where we talk about more of a building benefit towards the back half of fiscal '26.

And Bryan, Tod, just a little bit more. So I also want to emphasize that we have taken our best shots according to our -- all the planning that we have for those benefits that you're looking for. And we have put those in the current guide that you're now in possession of?

Your next question comes from the line of Angel Castillo with Morgan Stanley. .

I wanted to touch on the pricing trends a little bit. You had a 2%, I think, in this quarter, but got the full year guide or around 1%. Can you just talk a little bit more broadly about what you're seeing in terms of pricing dynamics in the market? And just how should we think about kind of the full year and ability to potentially -- how that be looking at what you saw in the first quarter or why that doesn't persist?

Angel, this is Rich. Yes, just talking about pricing I would say, in general, if you think about where we're at, and I go back to sort of what we're trying to do principally, which is have fair and balanced relationships commercially with our customers. We are in a fairly normalized pricing cycle after the past few years.

And I think what you see in the guide is exactly that. So costs are being managed well. and we are pricing competitively in the market. But again, more normalized to sort of back pre-COVID type conditions.

Got it. That's helpful. And then you gave a lot of helpful color on some of the end markets here. I was hoping you could dive a little bit deeper maybe on the regions and what you saw during the quarter. And in particular, I would be interested to kind of hear what you're seeing in terms of November to date and how some of these trends may or may not be kind of progressing given that most of your guys other than -- on or -- were essentially unchanged. So just how things are progressing in November.

Yes. Sure. This is Tod. So the say the best region or the most consistent region right now is Europe. Europe continues to actually strengthen a bit. We saw that within the quarter -- from the fourth quarter last year to the first quarter this year. So Europe is doing quite well in a broad-based manner across our businesses. U.S., we're seeing a bit more careful within the first quarter of this year, but still on a solid foundation Latin America.

Also, we're being very careful across Latin America. It's got some highs and lows. It's really pretty uneven across Latin America. Asia Pacific is doing okay. Obviously, we had a nice quarter in China based upon the wins that we have and the share gains that we continue to have in China. But we're just trying to be very careful on China.

We've had 2 quarters in a row but we're still not really ready to call it economic recovery or green shoots or things like that. We really prefer to see more data points. All in all, though, we grow in everywhere in the world. Right now, we're executing really well as a company. And I'd say that's the regional summary.

Your next question comes from the line of Adam Farley with Stifel.

Let's start on the mobile aftermarket piece. Really strong growth there is good to see. Did you win any incremental share gains this quarter? Is this mostly carryover benefit from prior ones? .

Little bit of both.

Look at the aftermarket -- talking about .

Sorry, go ahead, Adam.

Aftermarket channel side, do you think you're seeing any concessional restocking activity?

On the independent channel, a little bit of both, some share gain, some carryover obviously from share gains that we've been talking about in the prior 2 quarters on the OE aftermarket channel. As a reminder, quarter 2, particularly on the OEs, we do see a dip as the OEs really do some balance sheet management, typical behavior. We did start to see that a little bit in October.

And so we think it will be on the OE side, the typical behavior for them, and we put that within the guide. But it's not anything more than typical behavior and we're at holter levels, and we're feeling really good about both the independent and OE channels on the replacement parts, and we're executing very, very well for our customers.

Okay, fair to hear. Maybe on the industrial side, what were the primary drivers of the decrementals this quarter, was it mainly the lower volumes in AMD? Or were there any other maybe onetime items of note?

Adam, Brad here. So the decrementals, the -- it was about flat for the total segment, but definitely pressure in the gross margin from higher operating costs and expense leverage, the pressure on those costs. So it's kind of the combination of those 2 things. We do expect it to build up from here over the course of the year.

The challenge is timing in these businesses, and you touched on it with A&D, this can be a very lumpy business. And when that comes through, that's very good. And obviously, we'll have some fits and starts, like we have for probably the last 8 quarters in that business and then project timing on the IFS side.

Yes, Adam, this is Rich. The only other thing I would add is we spoke about our footprint optimization work. The vast majority of that sits in that space. And so that work will continue, and we'll see the benefits in the latter part of the year.

Your next question comes from the line of Brian Drab with William Blair.

The first one, I just wanted to dig into the industrial outlook a little bit further, up 1.5% or so in this quarter, but the outlook for stronger growth, so acceleration. And can you just put some detail around that forecast?

Yes, Brian, this is Brad. So I think part of it is this timing that we mentioned. I mean, defense was particularly challenged in the quarter. There's still some supplier issues that we've been talking about for a while in this business that pushes some of those sales out, also some project timing, particularly with Power Gen. I mentioned earlier in this call that we had a good quarter, but obviously, these are big projects, and we have a lot in queue that we're working to get out so those are the couple of things that build.

I mean it's hard to say exactly the date, and we won't go into quarter-by-quarter guidance. But like I said in the earlier answer, industrial, we do expect it to build up from here in terms of sales volume and profitability.

Okay. Okay. And then in the disc drive business, can you talk a little bit about what's driving that in the near term? And what's the long-term secular outlook for that business now? And I know you probably don't want to talk about how significant that is in terms of revenue dollars, but if you could give us any sense for how large that business is now, that would be helpful.

Yes, Brian, this is Rich. I'll talk about the outlook and what's driving it. But clearly, our customers in this space continue to evolve their technology. We talked about HAMR in the script. It's the latest technology driving really technical challenges in the filtration space. And so we're seeing both share gains and market upturn. A lot of that's being driven by the AI and the cloud-based work. That's the predominant driver of that. Our expectation is we'll continue to see a lot of strength this year. And we believe that, that trend will moderate, but still continue to grow in the coming years following that secular trend.

Brian, Brad, again, we can triangulate that for you. It's a couple of percent of total rev -- couple percent of total Donaldson sales.

Okay. Got it. And by the way, Brad, after like 15 years, I do recognize all of your voice is really clearly. .

But it's for the AI man.

Yes. No, I know it's not for me. I guess it's been like 17 years. So a quick question, last question -- yes. This is Brian Drab at William Blair. One last question. Is data center in general, maybe for your industrial business, I'm thinking like Torit dust collectors. Is this data center opportunity going to materially impact your business going forward? Like what are the opportunities in there?

Brian, this is Rich. This cross is actually both our Life Science segment and our industrial. And so if you think about these data centers, we're touching them in a lot of ways. They use a lot of power. So it's really good for our power generation business on the input side. We have a microelectronic business where we're doing chips.

These are also being fed into these data centers. Our disk drive business. Clearly, we just talked about. And we're also seeing some new opportunities using some of our food and pet products in the cooling, the water cooling. And so we've seen some pretty nice upticks in demand based on -- a lot of these folks were using air cooling before and they're switching over to liquid cooling.

And that's driving some nice business opportunities for us. So we're coming at it from multiple angles, probably a little bit less so on the dust collection standpoint. That's more of an HVAC play. But the rest of our business is touching this in a lot of ways.

Your next question comes from the line of Laurence Alexander with Jefferies.

Could you help just with the overall rate of share gains, what the impact is on either the first quarter sales or what you're baking in for the full year. Just to give a sense for how much you're outperforming the end markets.

Well, just generally, as you look at your models, share gains typically within our more mature markets or more low single-digit type of gains that help us to grow on an annual basis. So if you just kind of think of it that way in our mature markets, in our more immature markets, it could be pretty lumpy or in our project-based businesses.

It could be lumpy like power generation, obviously, where you have multimillion dollar projects. But the best way to look at that is in our mature markets, it's a low single-digit type of a situation.

So I guess if power gen, for example, were to accelerate over the next couple of years. Does that mean the net contribution from share gains is increasing or declining from this year?

Increasing. Because our overall power generation business will continue to grow as we look forward. For example, we told you in the script that we are at full capacity for the balance of this fiscal year.

And then I guess just lastly, just if you look out 4, 5 years, what's your view on kind of how much capacity you might need to add in some -- in those businesses to sort of keep up with the projected data center build-out?

If you look back to the last 5 years of Donaldson Company and you take a look at our investment levels, our CapEx, et cetera, the new manufacturing facilities that we put, we sit in really strong shape to position ourselves for when the end markets that have headwinds presented to us today when they recover, we'll be able to answer.

And so we feel as though we sit in a really strong position to really take care of our customers. It's one of our guiding principles. And that's the way we invested into the corporation. We'll be fine when that recovery happens. And so overall, plant expansions, et cetera, it will just be a normal cadence and standard work for Donaldson. There won't be typical rushes that other people may experience that -- we are really happy with where we sit.

Your next question comes from the line of Tim Thein with Raymond James.

The first question was just on the aftermarket business within mobile and just thinking about this for the balance of the year. The -- you grew nicely against what was the toughest comp from last year. So I know it's -- sometimes these things are -- run the risk of cutting it too finely. But the growth, it appears that you're expecting it to maybe settle a bit from what you experienced in the first quarter. Can you just -- is that a fair assumption? And maybe just kind of walk through any assumptions that may be included as to how you're thinking about the balance of the year for that?

Tim, that's a fair assumption. And maybe just to be a little bit more granular. When you break up the OE growth versus the independent channel growth in Q1. I would tell you that the OE growth is low single digits and the independent channel is more double digits. So that kind of shows you the mix. It also speaks to the share gains that we continue to win.

But we do think, particularly in the second quarter, as is typical every single year, the OEs will balance sheet manage, we'll go more muted, and then we'll bounce back in our typical secular fashion year-over-year in the second half.

Okay. All right. And then the -- just on the these plus 40% incrementals are pretty impressive. In terms of the benefits related to the footprint optimization, is there a way to help us think about what that is yielding as we exit the year, kind of a starting off point thinking about next year once these savings are kind of fully in the numbers. Is there any help you can give us on that?

I guess Tim, I'd point back to the comments I made about triangulating the full year. I won't break it out into the specifics of this is where exactly that number lands. But if you think about operating profit tilted 55% comes in the second half. And all of the -- I shouldn't say all -- most of the -- that is gross margin expansion. We'll continue to get expense leverage as we go through, but a lot of that is gross margin. And some of that is from the Blumen optimization. We will have the natural volume leverage but we do expect to start to build on the momentum as those projects are complete.

Your next question comes from the line of Rob Mason with Baird.

Congratulations on a good start to the year. And just around that, Tod, it's somewhat uncharacteristic or at least recently, for you to change guidance or raise guidance after the first quarter. And it looks like maybe I can trace that to the improvement in the margin expectations. But as you kind of walked around the world, they're reasonably use the word careful a lot also.

So I'm just -- maybe a little more context on where the confidence is to go ahead and raise the guidance. Is this all kind of self-help driven margin controlled? Or is there anything else moving around within the sales outlook within the ranges that you have that did not change, but is anything moving up? Or any other context you can give us?

Sure. Absolutely, Rob. So when we take a look at the portfolio, right, we have a strong diversified portfolio of businesses, all the puts and takes. We do have some headwinds in the portfolio, but we are winning share gains. You look at our aftermarket businesses in industrial, our Mobile Solutions businesses the way our Life Sciences business, particularly food and beverage performed, you take the highs.

The highs are higher highs than the lows are on the step down. And so consequently, we pride ourselves on being transparent for all of you and helping you understand our company and we felt as though we would do that again this time rather than hold back, and that's our guiding principle. We feel very good and confident about where we are to execute the year. And so that's why we did that.

Very good. Well, maybe I'll press you on the transparency. Can you speak to -- you talked about your power gen business, having a lot of demand, order books full. You also seemingly sound comfortable on where your ability to improve capacity.

But can you give us some feel for how that business can grow this year, given it is in kind of a sold-out position, at least within the context of the mid-single digit for IFS, where that may land for this year, Power Gen.

Yes. The biggest challenge for us within Power Generation is because of full capacity utilization is the ramp up and ramp up to the level when you see that business really go as hard and as fast forward as it is are usually more complicated than just kind of running it, as you might imagine.

These things are -- one order could take 40 semi trucks full of fabricated metal to be shipped somewhere in the world. So it's really that part of it. That will determine our overall growth rates. We baked that into the guide. We've taken our best opportunity to do that, we believe that at this point, that year-over-year will be kind of mid-single digits on the growth.

There is a chance we can have some upside if we execute better. But because those projects are also multimillion dollar projects, if you have a site not ready at a customer, they could push out delivery into another quarter.

As you know, you've been following us a long time and even into a fiscal year. So we've tried to just balance all those macro factors into the guidance that we gave. It's obviously an important component of our story right now, and we're working hard to execute it for our customers.

That concludes our question-and-answer session. I will now turn the call back over to Tod Carpenter for closing remarks.

That concludes the call today. Thanks to everyone who has participated. We all at Donaldson, wish all of you a safe and happy holiday season, and we look forward to reporting our second quarter earnings in about 90 days. Goodbye.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.

All right. If everyone could please get situated. We are -- We have the great pleasure of having Donaldson with us again; ticker DCI; Minneapolis-based global manufacturer of filtration systems and replacement parts and have some exciting technologies in the Life Sciences business. Tod Carpenter, company's Chairman, President and CEO, is here, as is Rich Lewis, the company's COO. Hi, there. The company is about 115 million shares, trades around -- it's about a $10 billion equity cap business, about $10.4 billion total enterprise value. I had the pleasure of having Donaldson here as long as I can remember, whereas in shareholder returns will tell you that you'd probably pay attention. Tod is going to come up with a few slides, and then we'll get into some Q&A. So Tod. Thank you very much.

Thanks, Brian. Appreciate it. So safe harbor announcement here to please all the lawyers. You've all read it before, won't spend time. But the important thing here is that we actually completed our first quarter 3 days ago. So any remarks that I do make will actually be at the -- looking back to the close of our fiscal year, reminding you that our fiscal year is August 1 to July 31. So we're reporting -- we'll be reporting our first quarter at the end of this month.

So 5 takeaways that I'd like to have. You really remember about our corporation strategy is simply defined as choices. Our first choice is to be a technology leader in filtration. Second choice is to be everywhere the customers want us to be, therefore, we are a global company and the third choice is to have deep customer relationships because we are technology-driven, that allows us to have best-in-class technology and 3 years ago, we redesigned a company from a regional-based company to more of a vertically based business oriented company that has allowed us to make faster decisions and be more agile.

Our solutions help our customers meet their sustainability targets. We have clear strategic and balanced growth strategies across every one of our businesses. Then about 3 years ago, we actually entered into the Life Sciences segment, which we'll talk further in the presentation. This is a very important slide, probably the best slide in the pitch, if you want to understand one thing about our company. We are a 110-year-old filtration company. We are roughly at around $10 billion market capital at close market today. We have over 3,000 active patents. We said we are a technology-led filtration company. What that really means is between Investors Day of April 2019 and Investor Day of April 2023, on average, somewhere in the world Donaldson Company was granted a patent every day.

So we really look to be differentiated through technology. Our model is -- proprietary filtration to sell razor blades. So razors to sell razor blades. You see that in the lower left where 68% of our products, our replacement parts, 32% are that first-fit or CapEx-based parts.

If you look in the lower right, you can see coming out of COVID, and you look at our revenue, we have been putting up record after record after record after record, 4 years in a row and running, both in EPS as well as revenue, and we look to continue our growth this fiscal year, I'll show you that in a couple of slides.

[ 44 ]% U.S. and Canada, 30% in Europe, 10% Latin America and 17% in APAC. It's important on the lower bars, the lighter blue is the aftermarket piece. The darker blue is that first-fit piece within each of those business segments. We are represented physically in about 80% of the countries in the world that our customers want us to be. And the second checkmark there on the right is very important in this world of tariffs. 75% of everything that we manufacture is manufactured in the region that it is consumed.

That allows us great flexibility where our customers want us to manufacture. And also on our $3.7 billion worth of revenue last year, our tariff exposure was $35 million. You could see that strategy of being where the customer wants us to be and manufacturing within region has really served Donaldson Company well, allows us to be agile and flexible for the customers in this time of uncertainty.

I told you about the records we put up last year. Here is our guidance that we just put out. It is yet another record. We will be $3.8 billion. We will also put up record operating margin at 16.4% at midpoint or expanding roughly 180 basis points of operating margin over a 3-year period and our EPS will also be a record at $4. Important, last year, we did raise our dividend by 11%. We are a proud member of the Dividend Aristocrats fund, meaning we have increased our dividend for at least 20 years in a row for Donaldson Company -- it's actually 30. I told you we're a filtration leader. When you look at our competitive advantages, we have a long history of solving complex customer problems. We do have deep customer relationships. We are an industry leader in all the markets that we do serve. Again, high aftermarket retention due to that razor to sell razor blade model, and we have best-in-class operations.

We have now coming out of COVID and then the subsequent supply chain issues that everyone in the world suffered through. We have now taken our late positions to all of our customers even lower than it was pre-pandemic. So our supply chain issues are certainly behind us as a company. And when we talk about best-in-class operations, that's what we mean. We have 3 reporting segments: Mobile Solutions, Industrial Solutions and Life Sciences. All 3 have opportunities for growth. Within Mobile Solutions, think of all the alternative fuel opportunities as well as many aftermarket opportunities within diesel-based applications.

In Industrial Solutions, we are digitizing that space and connecting all of our products, thus allowing deeper relations with our customers in driving the aftermarket back. A few years ago, when you talked to us about our industrial space, we would tell you our first-fit programs we're about 65% of that particular segment and aftermarket was 35%. And today, it's now 50-50. That shows the strategy execution that we have had.

Within Life Sciences, within the Bioprocessing segment, that's elongated. It's well -- well known in the industry, that's pushed out a couple 2, maybe 2, maybe 3 years for us on some of the differentiated products that we are bringing out the market due to the end market headwinds. However, that particular segment for us is doing very good in the food and beverage which has similar technologies to the areas within the bioprocessing side. And also, as a result of cloud-based storage, our Disk Drive business continues to grow nicely.

Our use of cash over the last 3 years, our priorities remain the same: invest in the company in order to drive organic growth, M&A opportunities, dividends. Again, we talked about we did raise dividend last year and then share repurchases. We are a consistent story on dividends and share repurchases. We typically buy back 1% within share repurchases in order to offset dilution. And we have guided 2.5% this year. Last year, frankly, our stock price got ridiculous. And so therefore, we bought 4%. It was really the proper move for the company at the time because actually, what that did to our net debt-to-EBITDA ratio was took it all the way up to 0.7. So we have a strong balance sheet, and that seems like the right thing to do.

So we like to run the company roughly at about 1x long-term debt, 85% free cash flow and we have available to us with all the documents we have today at $700 million. Truth is we can get a whole lot more than that very quickly because of the strength of our of our balance sheet, and that makes us an acquirer of choice.

So again, we are a leader in filtration. We do have best-in-class technology. We help our customers solve their complex needs. Our strategy is a balanced growth strategy along with M&A, and we have entered strongly into the Life Sciences segment. So a very quick overview of our company. And with that, I'll pass it over to Brian for questions.

Yes, great, and thank you, Tod. Go ahead.

Okay. 68% replacement, love that business, okay? But can you talk about the life of the filter and how it has changed over the years, whether it's been extended and whether or not that -- there's a threat to someone making a very long-lived filter, which would impact your sales growth?

Sure. The actual replacement cycle depends upon the application. If you look at a long-haul truck, it's going to be about once a year. If you look at a mining opportunity, for example, it could be every 2 weeks, right? So that hasn't really changed -- sorry, go ahead, okay. So that hasn't really changed.

As far as extending the life, customers are looking at really driving cost down, first-fit costs more than the life opportunity. And so if you can give them equal life, less cost, they'll take it. One example, if you look at over-road trucking, and you'll see the trucks with the stainless steel cylinders on the side, very boxy. We make those in Greenville, Tennessee, but our technology PowerCore reduced that particular application by 70% with the same filtration outcomes, so exactly the same performance, but it allowed them to put it under the hood going after aerodynamics. And obviously, that gave us a leg up in the aftermarket because it's a highly proprietary technology.

People look more to that rather than extending the life. We could, for example, take your lubrication filter and we could make that last 1 year, 2 years, whatever you want, but you don't want to pay for that. And so that really isn't what's driving the marketplace.

Tod, just kind of taking a step back strategically -- or to talk about strategy and Life Sciences specifically, given that maybe the drug development cycle has been slower than otherwise anticipated, how do you balance strategic priorities for both your core engine and industrial business and also life sciences now going forward, particularly from an M&A perspective?

Sure. So what we're really doing, we talked a lot about Life Sciences because that was a new entry, but we invest in our core technologies and Life Sciences organically to win where we can win. So we'll press hard where we see opportunities. And you see that strategy paying off in the market share gains within our Mobile Solutions business as well as our Industrial businesses. Those strategies are doing quite nice for us. So we press wherever we can on the organic side.

Within Life Sciences, since those are new products, and 2 of the acquisitions, for example, were 0 revenue-based companies that were really pre-revenue, we were going to really drive that out to market. It's just elongated on us. We still like the market space. We will look to acquire really in -- this is part of -- maybe part of what's -- may be overemphasized on the Life Sciences. But we would buy into Mobile Solutions if there was a technology advantage, for example, in alternative fuels, we'd buy there.

We'd certainly buy into the industrial space in order to help that business and do more bolt-ons. And then we're also can in the life sciences space. So our M&A strategy is really more broad based than probably understood.

Understood. Talking about portfolio evolution over the next several years, how much of what you're looking for is, we'll call it, breadth of offering versus penetration deeper into markets with customers?

Yes. So I think the evolution of the company over the next few years will really be our best opportunities more aftermarket Mobile Solutions as well as Industrial Solutions simply because the OE portions, remember, construction, mining, ag and long-haul trucks are all down right now. So that's at 32% to 35% of our company are feeling headwinds. In spite of that, every year for the last 4 years, we have grown. And when those companies come back, they don't -- when those markets come back, I mean, they don't come back by 5%, they come by 15% or 20%. And you see that in long-haul trucks, for example, they're down from 320,000 down to somewhere in the neighborhood of 210,000. That will come back. We've seen that before in the 2012 to 2016 recession. We feel this is more similar to that type of activity and expectations looking forward.

So short term, our aftermarket opportunities are really going to drive us. When those other markets bounce, clearly, we'll have tailwinds because of our aftermarket opportunities and our first-fit positions with the OEs.

Spend a couple of minutes talking about what you're seeing in those off-road markets and then a couple of minutes on the on-road whether it's ag or mining or construction as far as any sort of green shoots that you might be looking for? I think you all talked about it a little bit on the last call.

Sure. Maybe I'll let Rich talk through that one.

Are we on?

Yes.

Yes. I think if you take the aftermarket side of the business, we're seeing demand coming through pretty much at pull-through levels or kind of normalized inventory. I would say last year, it was sort of region by region. So we saw a lot of strength in Europe and the U.S., some tough economic conditions in APAC and Latin America this year, we're seeing sort of broad-based improvement. So good on the aftermarket side. And then on the first-fit side, I think we're at bottom for sure, and we're looking for green shoots. I don't think there's anything clear that says it's coming back quickly. But we do feel like we have bottomed and those markets are going to bounce in the next 12, 18 months, we'll start to see some life would be expected based on past cycles may not be exactly the same as last year, but I think that's what we're expecting.

Tod, you have been very good at the razor-razorblade model and the margins, can you look -- just help us out with regards to the military and defense and aerospace, particularly in what's going on in Europe? Anything there that we should be kind of thinking about? Obviously, in Life Sciences, your EBIT margins, what do you say 5 years from now, how close will they get to the corporate averages?

So Aerospace and Defense first. So we have an Aerospace and Defense business that's grown nicely in the last couple of years, much like everyone in A&D we did expand our overall operating margin within that particular segment. We are taking actions to also continue to improve that operating margin. For example, we're shutting down a manufacturing plant in California right now. It will be shut in at the end of March, still keeping it in manufactured in the United States, but it's clear there's a better cost structure out there. It's kind of standard work for us. But within ASD, that's what's happening. As far as programs, we do have some long-term programs that actually now go away replaced by some new programs like the H53K helicopter, which is really just starting to get going, and that's all Donaldson technology. So A&D has a nice momentum. It's above company average operating margin.

It will continue to expand, and we'll continue to grind out more wins there, grind that out because I say that is the single longest sales cycle of any business in the company. It is not months, it is years and it could be a decade before you see revenue on that. So then when you look at the Life Sciences, what we did within the last 1.5 years, we had a big appetite when we went into strategically, things were really going well. The momentum was real positive within that particular industry. And then a lot of inventory started happening post COVID, it really put us back on our heels. We focus that particular business so that we can then really cut down our appetite, if you will. You can't eat the whole smorgasbord, right? And so that's what we did. We now have chosen and proprietized what we believe are our best opportunities going forward.

I think over the next 5 years, you'll see that whole business get up to company average. And when I say company average, we're not going to be sitting at 16.4% where our guide is. We'll continue to expand as a company. And so over 5 years, that will be to the new company average, and we see that path available to us.

You've spoken at length over the course of the last year or so about telematics and your ability to gain greater aftermarket share, particularly in the industrial side. Talk about that initiative and how that's bearing fruit.

Yes. This is really cool. So if you look at a dust collector, which us filter geeks we look at fondly. You'll drive down the road, you'll see these big dust collectors. If you have a missed a particular or a fume in a particular application of industrial, that's where our Torit based business goes in. We are connecting those so that you can send alerts to the maintenance person to say, listen, go out and change the trash, okay? So for example, that collects a lot of particulate. If you don't actually empty that trash, we call it a hopper, but it's really a trashcan, it could ingest back up into your dust collector, shut your entire manufacturing process down and you'll be shut down for 2 or 3 hours, no longer making widgets.

If you just do what our alert says, it takes you 15 minutes you keep going. We went to 1 site, for example, we said, look, here's the value proposition. They said, okay, we'll try one. After a month, they called us back and say, we have 60 collectors on site, outfit all of them. So we're really getting good momentum. Why is this important? Deeper customer relationships like our strategy calls for and the aftermarket opportunity because it's so easy to do business with us at that point is about 3 to 4x more than what a non-collected dust collector is.

So we look to continue to press that forward. It is part of the quiet little secret of the growth that we're seeing in our industrial aftermarket. We actually need to really hook them up faster, if you will. We look to hook up about another between 2,000 and 2,500 this fiscal year and the momentum will continue to grow.

Does that same technology translate for your engine markets?

So it's different with an engine. With an engine -- so a lot of this AI and all the conversations within filtration industries. If you just take our products, for example, and you can imagine a filter, you can't put AI in a filter, right? But within an overall system-based, you can put sensors, right? And the sensors then will give you operational data that come back to us, which allow us then to turn the world into our laboratory and our first-fit-based systems then become best-in-class applications for all of the customer base. So you can reduce the size of them and really give the customer a better experience. And that's what we're really looking to do. So it's really more of a sensor game for us rather than digitizing some other kind of application, if you will.

Talk about the last 3 or 4 years, you've done a spectacular job in your core business, driving profitability. And we're in a very fluid environment from a tariff standpoint now. So maybe what lessons from supply chain disruptions have you been able to kind of make just a part of who Donaldson is right now from an operating standpoint? And how are you a better operator now as a result of those...

Yes. Well, first, I would tell you, I think our operations team is daily. Simply put, we're good. And I know during the overall supply chain disruptions, we weren't where we wanted to be, but we were better than all of our competitors. And we had customers calling us from our competitors and saying, "Hey, can you please sell to us" and our answer was no because we're going to take care of the customers that we have.

While that weren't turned out pretty interesting in today's environment because some customers are calling us back and saying, "hey, I really like what you did there. Will you take me now?" And you can see that within some of the aftermarket share gain that we have been getting strategically and our operations team is doing really, really tremendous work. We always consider standard work as taking a look at every plant, have that plant stand up on its own merits.

We are currently in the process of shutting down 3 manufacturing plants, 1 in California, a large 1 in California, a very small 1 in California, which will then read us of all manufacturing in California. And then we just finished shutting down 1 in England, and we sold the land there. So we continue to focus in on where -- our cost structure is best laid, and we just consider that standard work. That's really more of who we are within our operations team, and it's really helped you can see our operation expansion here in the last couple of years.

Looking at your balance sheet, clearly very conservatively levered, but part of that is just simply due to the amount of cash that you all generate. From an M&A pipeline standpoint, anything that we should be thinking about you wanting to expand in your core engine or industrial segments.

Well, if you take a look at Industrial, we have a host of businesses within Industrial. We do everything from industrial dust. We do industrial hydraulics, right? So we're doing air and liquid across multiple applications. We look to do bolt-ons within those opportunities geographically, technologically. That is really a focus for us. If we can expand and continue to diversify the company with new industrial-based applications, filtration focus, where we have an underlying technology that gives us an advantage. We'll continue to do that. Our M&A pipeline is full. It's strategic, and we continue to work it every single day.

Your question, okay.

Are you shutting down the 2 California plants because of our rules and regulations.

Rules, regulations, costs, all of it.

Why is cost of high?

It -- really, the -- when you consider all the overheads and the cost of doing business in California, it is really problematic. I'll tell you what, we're moving this to the Hartland. We're moving that entire manufacturing plant to Illinois, the pay back 2.5 years, okay? That should tell you how bad California has gotten.

At least you could tell our government of that.

That's someone else's job. We're just trying to be a filter company. I'll leave that to everyone else.

Mario, do you have one? Okay. You went to 4% of the shares on the repo last year. Would there ever be a scenario where you just decided -- similarly when the stock got silly that it's effectively an M&A of your own company, why not even be more aggressive than that.

I don't think that's -- I don't think going private is the best use of cash for us.

I didn't quite say all that. But you said that and now it's in my head.

Look, we'll continue to be opportunistic on the buyback. But buyback is not our story. Buyback is not even our game, right? We're just a consistent buyback company. We just do 1% to offset dilution. The only reason we acted the way we did last year is, frankly, it was ridiculous, okay? We were down like $61, $62. Today, we're sitting at $84. I mean it just made sense that was the best use of cash. And because we had such a strong balance sheet. I think at the time, we were 0.6. We went all the way up to 0.8 and now we're back down to 0.7. So we returned over $400 million to the shareholders last year in the form of buybacks and dividends. It was just an opportunistic moment that we couldn't pass. That's not who we are, though.

You're victims of your own success in a very difficult environment. So I applaud performance by the operating team as well, Rich. And I thank you all for being here. It's always great that you support us every year.

Thanks. Appreciate it. Thanks for your interest.

All right. Good afternoon, everyone, and thank you for joining me. For those who don't know me, name is Angel Castillo. I'm the U.S. machinery and construction analyst here at Morgan Stanley. And before we get started, I just want to read a quick disclaimer. So for important disclosures, please see Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative.

And with that, it's my pleasure to host here today. So we have Rich Lewis, recently named COO of Donaldson; as well as Brad Pogalz, CFO; and Sarika Dhadwal, Senior Director and IR and ESG as well. Thank you all for joining us today.

Maybe just a good place to start, I guess, for those of who may be not as familiar with name, we could start hopefully with a little bit of kind of opening remarks and setting the stage. You just reported earnings recently and had record results, record sales despite a macro environment that's pretty challenging. So just help us understand what makes Donaldson be able to deliver that in this backdrop.

Yes. So maybe a little bit of information about Donaldson. We are a filtration company, 110 years old. We're based out of Minnesota. Essentially, we're a diverse group of products, applications, end markets, very global. We're underpinned by a really strong R&D function. So we have a very deep R&D bench. We released hundreds of patents every year, really trying to own the science of the materials itself and the conversion of those materials into an end product.

As Angel mentioned, we just released our earnings. We had a record top line and bottom line year. We've released guidance for fiscal year '26, which started at the beginning of August. Again, expecting another record year. Part of why we're sort of resilient through the cycles as we do have a large percentage of our revenue is replacement parts. So we tend to do well through the cycles. I think 9 out of the last 10 years, we've grown the company. And generally, we grow profits faster than we do our top line. So our incrementals have been historically very good and very reliable.

Great. Maybe we can start there actually. And just a reminder for the audience, if anyone has any questions, just raise your hand and we'll get a mic to you. But maybe just on the aftermarket piece because I think that's a very core differentiator to Donaldson and your business overall. Can you just kind of walk or talk a little bit more about kind of the underlying drivers of the low single digits growth that you've had in aftermarket? And just kind of what is the kind of biggest driver of that performance as you think about that business?

Yes. So our aftermarket business, you're specifically talking mobile, I take it.

Yes, sorry, Mobile Solutions.

Yes. So it's -- we have 2 channels. We sell through our OEM and their channels. And then we also have an independent channel as well. A large portion of the incremental growth there is intellectual property, where we have filtration products that solve problems for our customers. But really, there's not very much alternatives in the marketplace. We've also been growing our share in our independent channel through larger deals like NAPA, but also a lot of smaller deals around the world where we take over small portions of the business. There's a natural growth to that market, plus there's an incremental pricing. And then on top of that, we would have share gains as well.

Can you maybe expand on that? Because I think that's one of -- one of the areas that's maybe a little bit harder from my seat to kind of quantify just the share gains whether it's NAPA or the one you just kind of indicated with out of your second -- or out of your last quarter. What is allowing you to take market share in those businesses? Anything kind of shifting in the competitive environment? Is it something about your product? And how do you kind of see that evolving in terms of the longer-term kind of tail to the opportunity on market share gains?

Yes. I would say one thing that has been unique historically about Donaldson is we do have a very strong position on the OEM equipment side. And if you look back over probably like the last couple of decades, those customers have put a greater emphasis on their service part businesses. We brought technology and intellectual property that have allowed them to secure more of that market share on their channel. So that channel has actually grown quite rapidly. And so we've been able to use both our technology and our position on the first-fit side.

On the independent side, it's really a story of availability, having a broad product coverage and having inventory in the right places around the world. We've invested in demand planning. We put our entire company on Oracle a few years ago, really to have a good integrated network and have good information management so we can know where our customer demands at, where our inventory is at and be able to optimize that basically globally. And we've used our strong balance sheet to make investments in inventory to take care of our customers through some very difficult supply chain challenges. And I think that reliability has also been a big factor in our share gain.

And as you think about just the Mobile Solutions kind of steady growth, particularly in the aftermarket. So obviously, we talked about the market share gains dynamic. What about just the underlying kind of normal degree of demand in that business? How do you kind of see that over time? And is there any aspect to that where if you're seeing weakness in On-Road, Off-Road, where there's maybe some strength? How does that ebb and flow and as you think about the broader cycle for Mobile Solutions?

Yes. I'll add my comments and then maybe Brad can jump in. But I think if you look across that entire business, think about the equipment side as sort of GDP. The aftermarket side is GDP plus a couple of points with pricing, and then you can layer on another point or 2 of market share. So that's how the algorithm works internally to the company. I don't know, Brad, if you want to add anything else?

I think that's it for the algorithm. The side that I'd say for the share gains is we're looking for opportunities around the world. So the thing that favors Donaldson is as technology moves up its curve -- or excuse me, as equipment moves up the technology curve, there's big opportunities because then there's a new need for more advanced filtration. So over time, some of these lower tax, smaller regional players just end up being consolidation of share in these specific markets that gives us new market -- excuse me, new growth in specific places.

And maybe just diving into some of the end markets specifically within On-Road and Off-Road, I think you had guided to a little bit of a rebound here in fiscal year 2026. I think high single digits in On-Road, mid-single digits in Off-Road. Just -- can you just give us a little bit more insight into what you're seeing in those markets? And what gives you confidence in that kind of recovery throughout the year, whether it's something you're hearing from your customers or kind of the shape of that?

Yes. I think it's -- obviously, those equipment markets are cyclical. The interesting thing is the sort of the shape of the cycles is fairly predictable. The timing of them, not always easily to predict. Essentially, what we're looking at is age of vehicles. We're looking at channel inventories. On the farming side, it's obviously farmer income, commodity prices. It's a little bit of a bet on the On-Road side, we'll see the market recovery. But we also know when that market recovers, it's generally 40% or 50% to peak to trough and trough to peak. We're putting in high single digits. So it's -- we're planning on a late fiscal year, kind of mid-calendar year sort of rebound. We'll see if it happens. The degree of impact for our company is relatively small. It's a small portion of our business. We believe we have plenty of other offsets in the plan that if that doesn't happen, we'll be okay to our guide. The ag market it's a little bit more moderated in our expectations, but we do believe that -- and we're hearing from a lot of our customers that they believe they're at trough, and they're slightly optimistic going into next year.

Got it. No, that's helpful. And I guess as you think about -- you mentioned the OE side is still ultimately the first-fit OE side is still a small part. I guess how should we think about the recovery of -- or as you start to see recovery in some of these first-fit, the implications to the aftermarket? Is there any kind of nuance there on the growth of the aftermarket side?

Yes. I think it's changed. Over the time I've been involved in the business, I would say they were fairly bifurcated on how they performed. But what we've seen in the last couple of cycles is as there's been an uptick in equipment demand, there's been an early maybe getting to the top end of their stocking levels on their replacement parts because they want to make sure they are well positioned for the replacement part cycles that they're expecting also to be good. We didn't see that in the past, and they would tend to sort of keep those things pretty much segregated. But the last couple of times on the way down, we've seen a little bit of inventory cut. I think post COVID, people have been protecting their inventories a little bit more because of the supply chain challenges that went on. But generally, we would see a little bit of uptick in replacement part demand as they get ready for hopefully better utilization rates.

Got it. Okay. That's helpful. And maybe just to kind of round out the Mobile Solutions side. Can you just remind us how you kind of -- your content per vehicle differs in within Mobile Solutions, I guess, as you evolve across diesel or battery or hydrogen fuel cell. I know there's been a lot of challenges perhaps on the clean energy side of the equation for transportation, but just ultimately, how you kind of see that world and maybe any implications of a slowdown in penetration on your business?

Yes. So I mean, content per vehicle will vary dependent on the end technology. We obviously follow this very, very carefully. We model it at an excruciating level of detail, plus we have other third-party sources of information. Everything that we've seen since the timing of this would be further out than we originally anticipated. So we're still thinking in terms of it's a decade plus on the equipment side to reach peak. The replacement parts side is much longer given the age and the length of the -- these vehicles are in the field. If you look at a fuel cell application, we would actually have a higher level of content than we would a diesel engine. If you think about combustion engines using lower carbon fuel sources, more or less the same content. And then if it's a battery-powered vehicle, we would have a smaller amount of content. We do have products that would be applicable there, but it would be a lower content.

And I think you had the partnership with Daimler on the Freightliner SuperTruck. Just curious, I guess, in that collaboration, any learnings about that? Or how are you seeing kind of the willingness of partners to kind of invest in some of these future technologies?

Yes. And I think what we're seeing across all of our customers is even though the technology change has been pushed out, they're still investing as a strategic part of their long-term technology development. So I don't think anybody is pulling back. I think maybe there's more partnerships we're seeing because people need to sort of hedge these costs. Also, the big play is going to be what other diesel emission regulations come into play while this is being pushed out. Generally, those have been good for us because it usually means a higher level of technology required on the filtration side. So yes, there's a little bit of uncertainty on that, but I think, clearly, they're committed to the technology, and we'll continue to partner with them across multiple product lines.

Yes. Can you just expand on that a little bit? I guess as we think about the EPA 27 being under review and all these other EPA emissions regulations, I guess, what are the implications to your business if it -- if one of these gets delayed if they get pushed out if they get repealed. Any kind of puts and takes? Or are you just kind of indifferent from that?

I don't want to say we're indifferent. Clearly, it will drive a cycle in some of the businesses. We've seen that multiple times. What I've seen is historically, every emission regulatory change that we've been involved with, we've expanded market share. We've generally upped the requirements of the filtration across the portfolio of products that we sell. I know one particular product line I was running a business, I don't know, 10, 12 years ago, we were really kind of a niche player with the equipment manufacturers. The lead competitor had not been investing in technology. Regulatory change came in, higher technology filtration required. We actually had something on the shelf for another business, an industrial business that we were able to leverage and move over to the mobile side. And we quickly built pretty close to $100 million business in one quoting cycle. And so that's a good example of where we actually don't mind regulation in that particular area. It's generally been good for us.

That's very helpful. And then maybe switching over to Industrial Solutions. Can you just remind us here on the Power Generation side? I guess, ultimately, how are you impacted by everything that's happening with powering AI data centers? How does Donaldson play into that world? And ultimately, what are you seeing the trends and the impact to Donaldson?

Yes. I think if you look at data centers, it's just another usage of power off the grid. We've seen a continued up cycle natural gas-powered demand. So it's not specific that we are naturally tied to those. But as it pulls power, it requires more gas turbines. And clearly, it's been good for our business. All of our customers are, I would say, trying to secure capacity for the next couple of years, and we're booked out pretty solid in our plants. We do have some upside in capacity, but the utilization is probably as high as it's been in a long, long time.

And can you just maybe elaborate a little bit more, I guess, on -- because a lot of, I think, the OEMs ultimately manufacturing these turbines are backlogs out a couple of years. So does that mean your utilization will run at those levels for a longer period of time? Are there any other kind of, I guess -- what is the competitive dynamic in this market? Are you seeing others be attracted by the growth and look to enter it a little bit more? Just a little bit more color there would be helpful.

Yes. I don't think so. The -- I mean, these are fairly intensive engineered to order custom design products per application, the depth of application knowledge, the base technology required, it would be hard for somebody to enter. Even going from a non-pulse sort of technology, which is half the market. We tend to play on more of the pulse side. Even jumping across there is not easy. Different applications, different expertise required. I think probably the biggest thing will be if this cycle continues on and continues to grow, how much capacity will people bring on to deal with it. Right now, everybody seems to be in position for the most part from what we can see.

Yes. Okay. That's helpful. And then I guess maybe just on the connected parts side, I think you mentioned a goal to grow the number of connected parts by 30% in this business. So can you just talk about a little bit more of kind of your go-to-market strategy here? And just what attachment rate you're seeing kind of new parts and what that has been?

Yes. So on the industrial side, it's -- it's a different business than our aerospace and defense and our OEM side where you compete really hard, you win a big program, you're on that program for 8, 10, 12 years. Every day, we're out hunting on the industrial side. So we have a lot of dust collectors in the field. Our competitors have a lot of dust collectors in the field. Our ability to connect those, predict when they're going to have maintenance issues, provide the stickiness to the customers that we believe based on data we have helps us win new first-fit business, but also helps us have better retention rates on the replacement parts. Our connected base right now is sort of low single digits in percentage terms. We're adding thousands every year, but it's a slow process. All of our new collectors where the technology works. We're sending out into the field when we control that. When we design the full system with the controller, we're sending those out connected. So there's a high percentage of those going out every year and then we're also trying to retrofit collectors that are in the field. We're also adding the service element on to it as well. So it's like, hey, you have a problem here. We see an alert. We send out a technician. We can put you on a maintenance contract. So we're using both connected solutions and services to create better stickiness with the customer, a more intimate relationship and hopefully, better demand generation over time.

Got it. Maybe -- and maybe switching over to Life Sciences. Maybe just to start out, I guess, you used to actually work with that business. Just good insight there. I guess, help us understand what you've seen kind of under the hood of happening in there because there's a lot of kind of moving pieces. But if you could maybe unpack that from a Disk Drive perspective, from an F&B and separately kind of bioprocessing.

Yes. Well, you hit on it, Life Science is really a collection of different reporting units -- what makes them sort of have some commonality as the base technology. The filtration technology that we use across all of those is usually a polymer-based filtration technology. It's a little bit different than what we would use in some of our other markets. It started with Disk Drive. That was the first one. We came into Food and Bev. We also sell membranes into medical applications. And then now we're getting into bioprocessing. I think if you look across that portfolio, they're all in different levels of maturity. So Disk Drive is a very mature business. Food and Bev is a business that's still growing and rapidly expanding and then bioprocessing is a business where the modalities that we're focused on, we're at the very beginning of their journey. So it's -- we're at different points of the life span of these businesses across this portfolio.

And maybe from a growth standpoint or kind of a top line or even margin standpoint, what does it mean for Disk Drive to be a little bit more mature? It's actually feel -- I feel like that's been an area that's been seeing good growth of late, a good level of recovery. So help us understand what that means for just the steady growth of that business going forward.

Yes. Just to give you an example, it's not completely apples and apples applicable, but I was at a heavy-duty business form when I was running our mobile business, and it was right after COVID. And one of the guys, he has a business where he was selling basically laptops with a software into the heavy-duty space. And he -- I think he said he had like 3 years worth of laptops. He didn't have any and then he had too many. We saw the same thing with our Disk Drive business. Coming out of COVID, it was pretty hectic. We saw that business compress down cyclically for 2 years in a row. It's come back in the last 2 years, been really nice step-ups. I'd say we're back at a steady state kind of normalized performance level. So we would expect that business to continue to grow sort of low maybe mid-single digits. Kind of like power gen, there are some capacity constraints in the market, not necessarily with us, but with some of the supply chain pieces to that market. Food and Bev is a faster-growing business, a more mature -- or less mature business, obviously growing more high single digits and then bio is pretty early.

Perfect. And then I wanted to, I guess, touch on Bioprocessing a little bit more. So just there's been a little bit of a push out of some of the demand there in that business. As you think about -- particularly as you were running that business, what are kind of some of the learnings, some of the positives, some of the negatives that you see both kind of either things that you would do -- would have done differently or maybe opportunities that still make you really excited about this business?

Well, we like the end market, and I think about it as an advanced industrial market. At the end of the day, whether we're selling into microelectronics, food and bev, dust collection, we're helping them protect their manufacturing processes. We're helping them get better quality, better productivity. If they're making a drug, it's a more regulated process. Clearly, it's a longer process to bring a drug to market than some of the other products that we sell into. It has pushed out. Sort of post COVID, the environment was very open to any changes that would improve the processes. And I think it's settled back into kind of normal follow the regulations, follow the drugs through the process. But we like that market. It's a market that values technology, and it's a market that continues to evolve very rapidly. So we think it fits with kind of our core strengths. Clearly, the companies we bought are early stage, and they're also pointed to early-stage therapies that are still developing the science behind those. And so we think it's a longer-term candle burn than maybe what we originally thought. But we still like ultimately the market, and we'll continue advance our technologies. And if they're really hitting home in the market, we'll be putting more money behind them than pressing them. And if they're not, then we'll sort of scale back, just like we would on any investment across our portfolio.

If you think about the one we just talked about Disk Drive, if you go back in Disk Drive 40 years ago, that business really didn't exist. And I know for like the first 5 years of its existence, it wasn't clear whether that market was a good market, a bad market, but we sort of stuck with it and kept advancing the technology, the market took off. And we see bio is kind of the same thing, just kind of stay with it, plant the seeds. It's just going to take longer to sort of see some of these mature.

And I want to come back to the capital allocation point that you made in a little bit. But just maybe first, how do you kind of see the structural or longer-term margin opportunity for this business as both cost improvements that you might be making as well as a recovery as well as the longer-term opportunity in bioprocessing? What does that kind of look like over time?

Yes. It's above company average for sure. And think about growth rates that are high single digits and margins -- operating profit margins in the 20s.

And I guess, is that just macro recovery or what aspects from a self-help that you can do to kind of get it closer to that level?

Yes. So if you think about the non-bioprocessing part of the business, it runs above company average on growth rate and margin. I think the bioprocessing is really about just advancing the products, and we're releasing 2 of the products this year. So we're a little delayed in those. So as things -- as the market pulled back, we also were a little careful, but we're advancing 2 product lines this year. We have a couple that are a little bit more mature. They have several customers in clinical trials. We need those clinicals to see their way through and see those drugs get on the market.

Got it. Okay. That's helpful. And then maybe just back to the capital allocation dynamic. So you've made several kind of smaller acquisitions or tuck-ins here. Just maybe could you just talk about the appetite given a little bit of that slowdown or the push, I thought we've seen to do something near term? Or should we think about the capital allocation strategy as perhaps pivoting more towards shareholder returns or other deployments of capital, other areas where you might see opportunities aside from bioprocessing as that kind of gets a little bit further along?

Maybe Brad can cover the capital allocation strategy and broadly, and then we can talk specifically about M&A and Life Sciences.

Yes. The biggest opportunity for us still is internal investments. But we do have an appetite for M&A. We're disciplined buyers. And we -- the criteria in a lot of ways is at least directionally the same as what we've been talking about a focus on Life Sciences space. A focus on industrial, growing the service business is where we've put some money. If we can extend products or geographies within industrial, we would welcome that, too. I think as far as opportunities in M&A, it's probably something that if we're in the bio space, more specific on revenue generation or more a commercial application versus more pre-revenue. But of course, M&A is tough because there's a buyer and a seller dynamic. And so we're always starting with the technology and then thinking about how it can apply. Angel touched on an important part, though, too. So we've got this invest in the business and invest in growth is a core part. That's number one. But we have a pretty long-standing dividend policy. We've increased our dividend annually for the last 30 years in a row, a member of the S&P High-Yield Dividend Aristocrat Index.

And then on top of it, we repurchase our shares as a means of giving back to shareholders. So overall, we write a pretty conservative balance sheet with the idea that we want to be prepared for acquisitions when they come along and investment opportunities in organic growth when they come along and then we would deploy the capital towards share repurchase as kind of a moderating lever. And last year, we accelerated that a bit. And now this year, in our fiscal '26, it's a little bit more of a normal level.

Got it. And I think you mentioned that conservatism, right? So your balance sheet is quite strong, and it does provide you a lot of flexibility. And the way I think about some of the deals that you could kind of do or that you've done in the past on the smaller side, just given how stable also your business is, why not, I guess, lever up to 2 turns and still have the flexibility to kind of lever up more while giving back perhaps more cash to shareholders via buybacks on kind of near term?

Well, money is less free than it was, so that's part of it. I think for us, looking at this around onetime turn is -- makes sense. We are below that. But again, the acquisition is an interesting part of an opportunity for us. And there was a year where we did a handful in the same year. And you mentioned there are tuck-ins for sure, but we want to be prepared for those moments, too, so that we're not at a point where we miss an opportunity as a function of the balance sheet. I think we're well covered on both sides.

And as you think about your pipeline today and what you're seeing from a potential M&A side, do you feel like the current environment is bringing some potential deals your way? As you mentioned, you might be dealing with privates or smaller companies, I guess, how does that pipeline -- how does that shaping out? Is there moving closer in terms of potential deals sooner? Or is that making things harder? How do you think about that?

Well, we have a fairly structured process for M&A. There's always a pipeline at different stages, sometimes it's nurturing relationships. Sometimes we might be nurturing a relationship for 5, 7 years before deal ever materializes. Some are -- we're just answering inbound inquiries. So it's a -- I would say the pipeline is a bit slower than what we would like, but we feel like it does seem like it's starting to heat up. We are -- as we said, we're positioned to do deals, but they have to be the right ones. And we're going to be disciplined about it. It has to be very strategic in nature. And I would say, as Brad pointed out, on the Life Science side, we have bets on the table. We're comfortable with those bets. If we look at other deals in that space, we would be looking for more profit generating companies at this point unless it was a very, very unique technology that was clearly going to have a large play in the market.

Got it. And I guess you mentioned, again, you've done some tuck-ins, right? But I guess with the balance sheet flexibility of firepower that you have, you could do something a little bit more transformative. As you think about that pipeline, what's kind of the mix of potential more smaller tuck-ins versus something that's a little bit more transformative for the portfolio?

Yes. It's interesting. There's not a lot of transformative deals that are out there. I mean the market is consolidated a fair bit. There still are a few and we think there'll be some in the future. But there's nothing clear on that side. I think the smaller -- we have a business that has 4 out of 6 products, and we have a great commercial engine. There's a couple smaller to midsized companies that bring the other 2 products. We can do it organically, but it might take 5 years, or we can go and put those 2 together. I think there's more of those type of deals out there as we speak today. But that could change tomorrow.

Especially in this market right now, a lot of changes. I guess maybe just kind of bringing a full circle in terms of some of the market share gains and dynamics. You mentioned consolidation. I guess as you think about your business, where are there still pockets where you might be able to consolidate or gain more market share as you think about, again, longer term, the ability to continue to deliver record earnings as the market recovers? Because again, right now, your end markets are actually in a pretty tough spot. So as that recovers, do you kind of foresee yourself hitting a new record? And what does that kind of growth look like at that point?

It's funny. I've been with Donaldson 20 -- going on 24 years. We were having the same conversation 23 years ago.

I don't know about what I'm going to add.

The good news is we're -- generally, every market we're in, we're either the leader or we're one of the leaders. Most of our markets have natural growth tailwinds. When you layer in on top of that, some of the strategic moves we've made operationally with technology, we've been able to consistently outgrow our markets, maybe not by a huge portion, like our Food and Bev business has almost doubled the market growth rate for several years in a row. That's a good example. Some other ones, it might be a point or 2. We think the formula works. We don't see any reason why the formula won't continue to work for a long period of time. The share gains are small and they're generally incremental. And it's really about just doing the basics that we've sort of put in place really, really well. We do think if you look across all of our products, our applications, there's some -- we've got some businesses where our market share is really, really high. I don't know that it can go much higher, but that's probably the minority.

Every other business, I'd say, 90%, 95% of our revenue, we're either mid-teens to mid-single digit market shares and expanding but slowly. So there's a lot of blue sky out there. We also think in some of our markets, there's going to be a fairly big shift. You think you look at the mobile market, 4 companies have half the market. The other half is very fragmented. We think over time, there's going to be a lot of consolidation there. Time will tell, but we believe we'll be a consolidator of choice on that side of the house. And then with what we're doing on the industrial from a connection service, we think we'll be able to continue to try to up the technology game and some of the smaller players that are more just hardware product focused, they won't be able to come along with it. So for the more larger companies that we do business with, we think that value add will sort of separate into 2 parts of the market, kind of a low end and high end. So yes, we're very confident. We'll continue to set records. We'll have to deal with any economic shocks like a housing bubble or COVID. But the formula, we would still see mid-single-digit growth and delivering higher levels of earnings on that growth.

Perfect. And then maybe -- yes, I think we have one question here.

[indiscernible] same trajectory when it came to clean energy transition and the transition of the transportation sector. But now those trajectories are somewhat diversed. So does that divergence in trajectory across the 3 major regions create more R&D requirements and that create less operating efficiency as you're servicing 3 different markets, which have different trajectories and different requirements and technology?

Yes. So if I understand your question, the different trajectories create inefficiencies for us. Yes. It's interesting. I would say not really. If you think about like our on-highway business, where we're strong is we're really strong in Japan. We're really strong in the U.S. We're solid in China, but it's not been a big part of our business because if you look about the trucks in China, they're significantly less cost than a European or a U.S. truck just by design. So they haven't really wanted to move up the technology chain. And so we really haven't put a lot of emphasis on. It's been more of the Off-Road and we specifically picked Off-Road there because the Chinese OEMs are going fully global. And so they want technology that competes on a global basis. And so they've tended to go higher technology straight away. And we're also like on the ag side as we see more industrial size farms coming into China. They want European and U.S. style equipment, more automation, more efficiency. So that fits perfectly into what we do. And actually, if you get into the base filter, not the first-fit systems that go on the vehicle, but the base filters, the manufacturing assets are very fungible. We can make an on-road filter and an off-road literally set up to set up. And so it's just a matter of making more of one and less of another. So no, it hasn't really created any inefficiencies for us. Actually, the agility and our global footprint and our ability to pivot is actually -- it's actually been okay for us.

I think that brings us to the end of time. So I appreciate your time. Thank you so much for coming here today.

All right. Thank you.

Thank you.

Appreciate it, Angel.

Laurence Alexander with the Jefferies Chemicals team. It's my pleasure to introduce the team from Donaldson. We have Tod Carpenter, the CEO; Brad Pogalz; and Sarika from Investor Relations.

Without any further ado, I want to pass it over to you. And just remember, go forward, don't go backwards.

Thanks, Laurence. With me today are Sarika Dhadwal. She is our Director of Investor Relations; Brad Pogalz, he is our Chief Financial Officer; and Rich Lewis, who will be here momentarily, is our Chief Operating Officer.

So forward-looking statement, to please all the lawyers in the world, clearly is in our deck. I do want to remind everyone that we did report earnings here just last week. And so consequently, everything that I do say will be up to date. So that's really good news.

Five points I want you to walk away from with is, Donaldson Company is a leader in filtration within all of the end markets that we serve. We have a history of solving complex customer problems therefore, best-in-class technology. We are helping our customers meet their environmental expectations through the solutions that we do provide. We have a clear strategic and balanced growth strategy for the company, and we continue our progression toward our Life Sciences market segment.

So here we are. We were founded in 1915. So we are a 110-year-old company, about 14,000 employees. In the lower left, you will see two operating models, if you will. First-Fit is about 32% of the company revenue. And aftermarket is 68%. So you think about our particular model across our entire business is proprietary razors to sell razor blades. You can see in our 3 segments, Mobile Solutions about 60%, 30% in Industrial and 8% to 10% within our Life Sciences based business. Updating the revenue and the adjusted EPS numbers shown below as of our fiscal '25 ending, which did end on July 31. Our new fiscal year started August 1. You can see almost $3.7 billion is our revenue and $3.68. You can see the growth through the last 4 years. Every number within our revenue and EPS is a record for Donaldson Company. We continue to grow well through the cycle.

Important on the patent line, I told you we are proprietary razors to sell razor blades. We now have over 3,000 active patents between our Investor Day in April of 2019 at our Investor Day in April of 2023. Donaldson was granted a patent, on average, somewhere in the world, every day. We're serious about being the technology leader. We continue to invest in R&D and press our strategy forward.

We are 44 -- or 45% U.S. and Canada, roughly 30% in Europe, Middle East, Africa, 10% Latin America and 15% to 20% in Asia Pacific. Very importantly, in this time of tariffs, it's important to note that 75% of everything that Donaldson manufactures is manufactured within the region that it is consumed, which gives us that natural protection, if you will, against so much of the tariff conversation of today.

Here is our guide, as of last week. Sales, we look to be a $3.8 billion company. You can see the growth rate there on our adjusted operating margin, it would be a record at 16.4%. We're very proud of the fact that over 4 years will come from roughly 14.5% to 16.5%. we always look to expand our operating margin on growing sales. That's just a belief of ours, core belief. We have done that quite nicely, as you see here on the chart, over the last 4 years. Our adjusted EPS centers on $4, up from $3.68. So the incremental margin within that plan is roughly 40%, really strong incremental margin for what we have just guided to the external world.

We are a filtration leader. Here are our competitive advantages. So clearly, a long history in filtration leadership. We've been doing this 110 years. We continue to broaden the company, expand it with into new end markets, all on the strong technology foundation. We're the leader in advanced filtration because of that technology, innovation that we have and that we continue to invest in. We have a high aftermarket retention rate. As I said earlier on the slide, 68% of our revenue is now aftermarket parts. And so you can really emphasize that razor to sell razor blade model.

We have deep customer relationships and our strategies, particularly within the Industrial segment really, I'll speak to that in a little bit, drive us to get even deeper with the customers and more intimate with them, diversified businesses of global sales which even though we have a number of our end markets that have headwinds today, construction, mining, agriculture, First-Fit, over-the-road trucks, all of those particular end markets have headwinds. The strength of our diversified portfolio still saw our company grow last year in spite of that.

And then we have best-in-class operations. We're very, very proud of the year that our operations team just turned in. We are back to customer delivery rates, even stronger than pre-pandemic. So think of 95% on-time delivery to customer request date when they wanted to -- when they want the product. That's what our company is performing to, across a broad base of portfolios. For example, in our mobile solutions aftermarket, if you order the part before noon, we'll ship it to you same day. We've been doing that for decades. That is not new at Donaldson Company, and we are back to that type of turnaround and taking care of our customers today. So these are our strong advantages that we have within our model and that we're very proud of.

We have 3 reporting segments: Mobile Solutions, Industrial Solutions and Life Sciences. Within our Mobile Solutions segment, we have been growing in our aftermarket-based products. We have proprietary technology on air and liquid, which really drives our aftermarket growth. We are heavily involved with all the OE-based, with alternative fuel-based applications. We continue to win on those type of situations around the globe. We have won things from fuel cells to hydrogen-based combustion engines, et cetera. And so we have really good growth opportunities within Mobile Solutions.

Within Industrial Solutions, we are connecting our products on the largest piece of industrial. So if you think about that, we sell a proprietary First-Fit system, then we sell our aftermarket products, but we connect that first base system. So when you get a new dust collector for Donaldson Company, when you plug it in, it will have a bunch of sensors on it. The maintenance people really don't know a tremendous amount on how to make that dust collector work. They just want to make whatever product their factory produces. And they don't want it to go down.

So things such as we have a thing called the hopper, really think of it as a garbage pail, you're collecting all of this particulate. Our people will send them an alert to the maintenance person's telephone to say, "Hey, go take out the garbage or it's going to ingest into their system, shut down their manufacturing process and then they'll be shut down from actually making money for 3 to 4 hours while I clean that out and reset it." Instead, we'll give them an alert. And it's a highly technical way to do that. That is actually patented now. And that they love that.

When we do connect our industrial-based products, it's been proven that we sell as many as 3x to 4x more aftermarket replacement parts, getting that deeper and more intimate customer relationship and it's proven out tremendously successful. We'll look to expand the connectivity of our Industrial Solutions by roughly 30% within this fiscal year.

In our Life Sciences-based businesses, it has elongated a bit more than we would have liked to when we went into this particular segment because the overall end market really found a lot of headwind and pressure within the last 2 to 3 years. So it's expanded a little bit more than we wanted to. But we do still very much like the market. We have differentiated products that we're bringing out. We have a little bit more development to go in that particular segment, but a lot of growth opportunities within that. We'll look to grow that mid-single digits this year and continue to expand that here in years to come.

Use of cash, it's important that -- this slide hasn't changed in decades. It's organic investment, so invest back into the company to help the company grow. It's buy companies, do M&As. Those are the first two priorities of cash. The next one is paid dividends. We are a very proud member of the Dividend Aristocrats fund. We have increased our dividend now for 30 years. Last year, we increased it by 11%. So we're a proud member of that. Dividends are very important to us. And then share repurchases is our fourth priority. You can see the usages of cash over the last 3 years where we invested $1.6 billion across the particular cycle.

Our net debt-to-EBITDA ratio stands today at about 0.7. We like to run the company at about 1. We have a very strong balance sheet, giving us a lot of strategic opportunities for ourselves. Our free cash flow is roughly about 85%. We like to run the company. That's what we guided to yet again this year. And we have more than $700 million available to us in order to really do strategic acquisitions. That gives us flexibility and agility to be an acquirer of choice based upon the strength of our balance sheet and so you can see within that second priority, which is to do M&A within our company portfolio, we look to execute that just simply because of the strength of the corporation.

So again, just closing before I open it for questions, we are the leader in filtration in all of the markets that we serve. We do have best-in-class technology. I can get very geeky with you and talk about the cool things that we have in laboratories, but I'll save you that for another day. We do help our customers achieve their sustainability and environmental-based targets. And we have a very clear and strategic balanced growth plan again, with our capital priorities of invest back into the company organically, do M&As. Those are our two primary growth levers. And then we are continuing our progress and still really like the life sciences market.

With that, that is a very quick summary of our company. And we can open the floor for questions.

So I guess maybe just to start, if you think about the end markets that have been more challenging, so ag, heavy-duty truck, pharma, life sciences, where are you seeing shifts in behavior that may imply a change in trend? Where are you seeing kind of optimism even if it's not yet shifts in behavior?

So if you look at the U.S., which is our biggest reason, it also happens to be the most mixed region for us. You'll see our First-Fit vehicles, so construction, mining, ag, on-road, all down within that particular region; a little bit more life in the ag market within the last quarter. If you switch over into -- well, first, staying in the U.S., the industrial segment is -- so CapEx-based projects is still very good. We are still receiving quite a few quotes there. So industrial, we're very comfortable with the progress that we have there.

Switching over to Europe. Europe is actually the most stable region that we have. We see pretty broad-based aftermarket growth. The First-Fit cycles are starting to show a little bit more life more broadly than the U.S. If you go to Latin America, it is easily the most troubled market. It's pulled back everywhere in aftermarket as well as within the First-Fit vehicles. It doesn't really matter. The country, they're all very careful. It is the smallest part of Donaldson Company at roughly 10% of our revenue.

And then Asia-Pacific, we have seen a little bit of life in China. That really drives the Asia-Pacific region on the First-Fit side. We saw some bump within the off-road sector and the on-road sector in China within the quarter. Does that really mean that we can call it and say, hey, China is starting to come back, we're going to be a little bit more careful about that. It's a little bit tough to say directionally where China really heads. It's more of a point than anything that you can discern and start to draw lines to, but we are pretty happy with the fact that it feels like we've troughed there. And the aftermarket continues to go quite well.

So really, you step back from all that, it's a fairly complex story, but it shows the power of the portfolio of Donaldson Company with that much mix. And yet Donaldson Company grew mid-single digits within the quarter. And so that's what we talk about by diversifying the corporation, we stand ready. When construction, mining and agriculture do come back globally, those markets do not come back by, say, 5% mid-single digits.

If you go back to history, the last time that we were in this type of a position, those markets come back by double digits, and it's not 10%. It's more like 15% to 25% on an annual basis. When they come back, they come roaring back. We stand poised to take advantage of that when we do see that occur. We do expect that to occur here looking forward. But even with that as the obvious headwind for our company, we continue to grow. And then this year, we guided additional growth of the company to $3.8 billion and a record EPS at $4.

And so one area that's been doing well is aerospace and defense. Can you dissect a little bit kind of how you're thinking about the growth over, say, the next 5, 7 years? How much of that is long-cycle projects where you're in qualification of new applications that will be launched? And how much of it is response to kind of shorter choppiness geopolitical needs?

So aerospace and defense specifically. So aerospace and defense is kind of an interesting story right now. You have to overlay the choppiness within that a little less from the external market-based, say, components or influences more to the supply chain portion of things. While we have gotten ourselves into a fantastic position within the supply chain and the rest of the company. With A&D, it's different because we don't get to control that. We get told where we have to buy some particular components. And to get a second qualification of a particular part is not allowed. And so we have to grind it out a little bit. That makes us very lumpy.

You see that within the results of last fiscal year, quarter-by-quarter, it will continue that way. There are a handful of parts, we call them the golden screw now that when we get that, we could actually ship. So it's more of that than the external influence as the end mark of A&D and what will continue to cause us to be more lumpy.

We also have some programs, some multi-decade programs now coming to end of life. So we'll have a little bit of pressure from that in this coming year, but we also have new programs coming on. So you go net-net within all of those dynamics. Aerospace and defense is a little bit more difficult because of the supply chain to really forecast going forward. But we do put it as more of a flat-based outlook year-over-year.

Can you talk a little bit about the levers you've pulled to improve Donaldson since 2023? And what do you have left to do, say, through 2030? That is, on the internal side that changes kind of the visible? Like think about it kind of the way you've outgrown the end markets. A lot of that was internal initiatives. Can you flesh out kind of what's left on the checklist?

Boy, that's a whole basket of items. There's not really one big lever that we pulled in order to expand our operating margin the way we have. It's a host of things. It's, for example, footprint optimization that we talked about on the call, where we currently are shutting down two manufacturing plants, the one in aerospace and defense business, one in our industrial base business, one in California, one in England. We have a couple of more footprint optimization programs -- projects, I mean. Looking forward, that will help us gain some more efficiency. So it's that.

It's also post the redesign of the organization, now putting it into verticals. We used to be four regional based type of companies. So Europe, the Middle East, Africa, United States, Latin America and Asia Pacific. We're all like four Donaldson companies. Now we went to verticals. And so 3 years on from that type of an organization structure, for the first time in our 110-year history, we are now gaining more efficiency out of that.

And really, you see that within our operating expense control year-over-year where we just are now leveraging more appropriately those type of business processes for efficiency and speed. So you'll see a little bit more tightening of the belt there. That's really more by design and tweaks to the organizational structure. You'll see more of that. We have more opportunity going forward. It's also within the supply chain disruptions that we all experienced. We went to our First-Fit customers and it was time to reset the relationships, and we wanted a more fair and balanced relationship with our customers, and we were able to achieve better pricing.

We no longer have price downs to start the year out within our annual contracts. Those are all gone. So instead of starting every year negative from a pricing standpoint of view, we have tailwinds on that on an annual basis. It's just a whole host of many different things that our 14,000 employees have really worked incredibly hard at, to really drive that leveraging across the organization, and what gives us confidence to stand up here today and say, we really are committed to increasing our operating margin over greater sales.

And I just want to unpack one of the comments there about the changing away from the annual price downs. In other industries, when we've seen companies shift that way, then when the customers run into trouble and the company, who is being more disciplined on price, sticks to the new methodology. You then sort of get a lot of feedback of how the customers are disappointed out for revenge, kind of feel hurt. There's a range of emotional reactions. This seems like a significant shift for Donaldson. Can you give us some sense of what you gave the customers in exchange to sort of get that transition to stick?

Sure. So what did we give them in exchange? Technology and reliance. They can count on us to deliver, they can count on our technology to perform exactly to the difficult application challenge that they give us. Our technology answers that call. They have great comfort when they do business with Donaldson Company knowing that their application is going to be met, and we are there everywhere in the world for them.

Remembering that we're in roughly 140 countries. We have between 60 and 70 manufacturing plants. We are global with a local touch. And so when the customer wants to move product around the world, we're able to do that quickly for them and manufacture it. That 75% within region where the customer consumes it is really a strong advantage for the Donaldson Company. And so that's what we give the customer.

Did we experience some of those things that you talked about, Laurence? Sure, we did? Do we lose some business along the way? Of course, we do. We'll lose a project here or there, but that's not new. That's always been going on. I know you will always have you lose a project because they're not going to get 100% of their business. And so we would tell you that the environment really has not changed.

We're not out to maximize with our First-Fit partners our operating margin, that's not our goal. We're just trying to optimize it. We're trying to have very fair and balanced relationships with our OEs. And I would tell you, for the first time in decades, we believe that we have done the work. We're treating them fair and that's where we sit today.

And can you talk a little bit about the work Donaldson has put in over the last several decades to make it a very variable cost structure. How do you manage the workforce to accept that, something like a furlough programs and so on? And how has that model been stressed by the increase in volatility in the last 5 years?

So what really I would point to is the redesign of the company. And so consequently, every vertical, every business within the vertical has a top and a bottom line target. You have to grow, you have to deliver bottom line. In the past, it was a bit easy to budget because you would peanut butter spread many things, used to really frustrate the heck out of us.

And now we can be more targeted. And people understand, look, if you're in a tougher part of the cycle, you're not going to get CapEx and you're not going to get other opportunities here this year because you're not the best opportunity for Donaldson Company to press and be able to grow. It's just where you are. And we have company reviews that are able to let us direct those type of investments now in a much more pointed and better way. And I think our company is faster to react to end market conditions.

And we also moved the manufacturing plants from a centralized type of one large organization back into the businesses, so that the businesses truly control everything in their business, and that allows them to flex the conditions that they're seeing within the cycle of that piece or total vertical. We're just more pointed and quicker.

And as a result of that, if you're in a particular business and you only had control of, say, 60% of, let's say, the consequence of that result of a business, now you have 100%. So it's been easy to get buy into just simply because everybody wants actually to control their own personal destinies. And it's worked out real well. Is it perfect? Yes, we still have some tweaks looking forward to go after, but we're feeling really, really good about the progress.

And so when you think about the discussion around patents and the frequency of issuing new patents, and you started off with -- I mean, Donaldson started off with like PowerCore and then Torit, and then it became a much broader strategy. Is that fully in the numbers now? Or is there a lag effect? And if there is a lag effect, let's say, it's 3 years, 5 years, 10 years, should it show up in terms of faster sales growth, higher margins, both? Like what do you expect the consequence of this patent strategy to be?

So here's a way to look at it. About 5 years ago, we created an organization in our Corporate Technology group, where they get up every day to invent new end market type of solutions. And so you take the balance of our technology capabilities, and you try to understand what end market unmet need there is based upon what the capability of the company is, or if we think we can solve that with the technologies that we have, we create a new technology.

And that particular portion of our company gets up every day and they are held accountable to having a minimum of 10 ideas that they're working on that can all become $100 million businesses for Donaldson. But when they do that, it's important to understand that our company doesn't go from 0 to 100 in, say, 12 months, even when we invent a cool thing. That isn't the way filtration works. It does get to 100, but you do have to grind that out a little bit more as you gain share, et cetera.

And so we have that revenue now more in front of us. I can tell you we have more than 10. If I pick on just one example, if you allow me a little latitude, Laurence. So the #1 solvent used in manufacturing GLP-1 drugs, and by any drug in the world is called the acetonitrile. Acetonitrile supply chain, it comes from China and Western Europe. Our partner actually boats it from Western Europe, drives it across the country to Torrance, California, uses 2 million liters per 1 chromatography column, and there are thousands of columns in the world, whereby they put 5,000 liters into a tanker truck every week, take it down to Mexico and incinerate it because no one has been able to reclaim it. It's very expensive stuff.

And if you could reclaim it to a 95% purity, you would be in terrific shape. Our group came up with a way that they thought would work where with our partner, we now have 17 tests in a row of 99.98% purity. And so the next step is 3 more tests, which we're very confident we'll pass. And then they will use it to create their drug, their GLP-1 drug, to see if that still works. And if it does, then, of course, we'll be in the acetonitrile reclamation business. That will take some time to build it out.

The simple explanation of how we do it is if we filter it, we filter it, we distill it and we filter it and all the filters are pretty complex. We do have the patents to be able to do this type of a process. But that's an idea that was born out of that group that now we are where I explained that we'll look to monetize in our fiscal '27 and going forward. So that's kind of how it works. And that's why I say monetary-wise, it's ahead of us.

And so with the 40% incremental margins, if you were to have a strong cyclical recovery, it's been a long time since Donaldson has had a triple witching where all the end markets are doing well at the same time. I can see two debates happening; one being people complaining that your margins aren't high enough; and the second being, well, whatever margin improvement that happens from here to there is cyclical and not structural and therefore, you don't get credit for it. How do you think about the next 5, 7 years in terms of like trends, structural improvement in margin versus potential cyclical scenarios?

Thanks for that question, Laurence. When you look at, should we really get the triple witching hour, and we really push forward. Our story is not going to change. It's exactly what's said in the slide. Every number up here is a record, record EPS, record sales, record adjusted operating margin, and that's the way we look at the company. So whether we get triple witching hour or -- and so therefore, we get a little bit of a headwind on our gross margin because the OE will actually make less than the aftermarket.

That doesn't mean we need tons of operating expense in order to deliver that. So we'll leverage it maybe a little bit different way. And our story will be the same. And that is record, record, record, just like we've done for the last 4 years and beyond and in spite of the headwinds that we've been experiencing. We welcome the fact when they bounce. When they bounce, our company will become $4 billion or greater pretty quickly, we believe, and we'll leverage that just as well.

And then just lastly on the innovation side. I think there's kind of this rolling debate in the chemical industry. I know you're not kind of purely a chemical company, this is my pedigree kind of showing, is that we're kind of hitting the end of material science innovation and the opportunities are more around sort of integrated processes or sensor technology or distributed sensors and analytics that way. As you're thinking about what's driving your evolving value add to your customers, are you seeing a shift in where you're seeing the low hanging fruit or the best fruit?

So I don't agree with the premise that events in the material science are slowing, okay? It may be the materials itself that may be slowing, but how you use those materials. What differentiates Donaldson Company is that we patent the actual media-based solution. We have people that know fibers. We create fibers. We have a paper machine in our corporate organization that a lot of companies don't have. So we patent our recipes that meet a particular application. We go all down the polymer-based chemistries, for example. We continue to play with those in order to underpin the poor structures of those. We understand how you can combine glass with cellulose and all the rest.

Those material science principles that really helped Donaldson lead in the technology are not going to change. They are a foundation of our company and who we are. So I really don't see that as a limiting factor in any way, shape or form, particularly as I have going through my head a number of things that we have in laboratories and such. So we're excited about the future and the possibility to invent more cool things and we will keep focused on that.

Okay, that's a cool place to close. Thank you very much for the discussion today.

Thanks, everyone, for your interest in our company. Appreciate you being here.

Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Donaldson Company Q4 FY '25 Earnings Webcast. [Operator Instructions]

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

Good morning. Thank you for joining Donaldson's Fourth Quarter Fiscal 2025 Earnings Conference Call. With me today are Tod Carpenter, Chairman, President and CEO; and Brad Pogalz, Chief Financial Officer. This morning, Todd and Brad will provide a summary of our fourth quarter performance and our outlook for fiscal 2026.

During today's call, we will discuss non-GAAP or adjusted results. For fourth quarter 2025 non-GAAP results exclude pretax charges of $9.5 million for restructuring and other charges, primarily related to footprint optimization and cost reduction initiatives. A reconciliation of GAAP to non-GAAP metrics is provided within the schedules attached to this morning's press release.

Additionally, please keep in mind that any forward-looking statements made during this call are subject to risks and uncertainties, which are described in our press release and SEC filings. With that, I will now turn the call over to Tod.

Thanks, Sarika. Good morning. Fiscal 2025 was a record year for Donaldson Company as we did what we do best, help our customers solve critical filtration challenges through the delivery of our high-tech solutions, which protect precision equipment and help maintain a cleaner work environment, increasing efficiency, mitigating risks and reducing downtime. We did this through consistent execution of our strategy and created value for our shareholders. I will start with some full year highlights, discuss our fourth quarter performance and touch briefly on our expectations for fiscal 2026. Brad will then detail our financials.

Lastly, I will provide some closing remarks before opening the call to questions. In fiscal 2025, we grew sales to an all-time high of $3.7 billion with growth across all segments expanded operating profit margin to a record 15.7% with an incremental margin of nearly 30% delivered earnings per share of $3.68, and towards the higher end of the guidance range we laid out at the beginning of the year returned $465 million to shareholders largely through the repurchase of 4% of our shares outstanding while increasing our dividend 11%, and focused our cost structure, including in life sciences and made progress towards footprint optimization, strengthening our foundation for future profitability while still investing for growth.

Our team accomplished a tremendous amount in fiscal 2025 through macro uncertainty and cyclical headwinds. We ended the year on a high note, and I will provide some details on the fourth quarter, including by segment. In Mobile Solutions, our strength in aftermarket is contributing to record results as we continue to win and gain share. In our independent channel, which eclipsed $1 billion in sales this year. Partnerships like NAPA allow us to expand our reach, and we continue to build these types of relationships.

For example, in the fourth quarter, we signed a new partnership with Mighty Distributing System of America. Donaldson is Mighty's sole heavy-duty filtration supplier of Donaldson-branded products and we are pleased with the early results. With respect to our largest first-fit business within mobile, Off-Road, sales grew after 8 consecutive quarters of declines as we see tangible signs of trough or moving out of trough conditions in the agriculture market. Our Industrial Solutions, IFS sales grew double digits through our create, connect, replace service model. I would like to touch on each piece briefly. Create, in dust collection, we are building new customer relationships and our OE channel sales hit record levels.

Our generation sales were also strong as we continue to benefit from the power gen super cycle. Connect, we are deploying our connected solutions. This quarter, we increased the number of connected machines and connected facilities and in fiscal 2026 and we expect to grow the number of connected machines over 30%. Through this, we are strengthening our customer relationships and building this revenue stream for the future. Replace, our razor-to-sell razorblade model is working with almost 50% of our quarterly industrial segment sales now driven by higher-margin aftermarket sales.

Service, this quarter, we acquired our third service business, RPS Associates of New England. RPS brings 40 years of experience in dust collection services with customers in aerospace, defense and other metal manufacturing industries and also adds a new geography to our service footprint. Moving to Life Sciences. Food and Beverage sales grew over 20%, both in new and replacement part sales. We are winning share through key OEMs and channel partners in this high-margin business. In bioprocessing, through our downstream Purilogics business, we announced the availability of the first manufacturing grade product within the Purexa portfolio to support customers' GMP or good manufacturing processes.

The Purexa membrane chromatography products enhance productivity with their high dynamic binding capacity, fast cycle times and efficient and scalable format, allowing users to process their product more quickly and reduce process costs. Now I'll cover some consolidated company highlights for the quarter. Overall, sales increased 5% year-over-year to $981 million, driven by volume growth, currency translation benefits and pricing. Adjusted EPS was $1.03, up approximately 10% year-over-year.

I'm proud of our results and would like to give a special thanks to our global operations team, who once again this quarter, navigated the difficult macro landscape, including the ever-changing global tariff dynamics. Brad will talk a bit more about the impact from tariffs, but I want to emphasize my confidence in the muscle we have built to address challenges quickly and effectively. Also in the quarter, we progressed on our footprint and cost optimization initiatives. We remain in the heavy lift phase of this work and expect to be mostly complete by the second half of fiscal 2026.

Through this, we have stayed focused on our customer needs. On-time delivery rates remain high and our backlog support our outlook over multiple quarters. I'm also pleased with our thoughtful expense management. While we lay the groundwork for a more efficient operating structure, it is important to note that we are making disciplined growth investments in strategically important areas through our R&D and capital expenditures, including in areas such as solvent recovery and new disk drive technologies in life sciences and air and alternative fuel filtration in mobile solutions cementing our leadership position in diversified technology-led filtration.

Now I'll provide some detail on fourth quarter sales. In Mobile Solutions, total sales were $588 million, a 2% increase versus prior year. Aftermarket sales were $468 million, up 3% and driven by strong demand in the OE channel from larger customers and market share gains in the independent channel. On the first-fit side, Off-Road sales of $95 million increased 5% as we cycled against weaker agriculture market conditions in the prior year. On-Road sales of $26 million declined 20% as a result of cyclical declines in global truck production.

Now on our Mobile Solutions business in China. Sales grew 14% year-over-year with increases in first-fit and aftermarket, marking the fourth consecutive quarter of growth. While we are still cautious in the near term on the overall market in China, we are encouraged by the traction we are gaining with local customers. This quarter, we won another hydraulics program with a local manufacturer in the agriculture market a sign of customer confidence in the Donaldson value proposition. Turning to Industrial Solutions.

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

In total, our results this quarter capped off a tremendous year for the company. Looking ahead, Donaldson is well positioned to further strengthen our foundation and capitalize on improving market conditions and cyclical trends. As such, we are forecasting at the midpoint of our guidance ranges, another record year in fiscal 2026 with total sales of $3.8 billion inclusive of sales growth in each of our segments, an all-time high operating margin of 16.4% and ahead of the fiscal 2026 target we laid out 1 year ago and record earnings of $4 per share.

Now I'll turn it over to Brad, who will provide more details on the financials and our outlook for fiscal 2026. Brad?

Thanks, Tod. Good morning, everyone. I want to start by thanking the Donaldson team for delivering another strong year. We were navigating a complicated environment and had to make some difficult decisions, particularly related to structural cost changes and the teams delivered. Our approach is simple, grow the company, grow profitability, maintain expense discipline, make thoughtful investments and return cash to our shareholders. We did that in fiscal 2025 and expect to do it again in fiscal '26.

Now turning to a few highlights from the quarter. Note that my profit comments will exclude the impact from the restructuring and other charges Sarika referenced earlier. Total sales increased 5%. Operating margin was a record 16.4% and up 10 basis points over the prior year. Adjusted EPS was $1.03, 10% above the prior year. And as expected, cash conversion was strong at 123% and as we successfully worked down inventory and delivered to our customers. Going further into the P&L, gross margin was 34.8%, down 140 basis points from 2024.

And the impact from tariff-related inflation on our LIFO inventory valuation was significant this quarter. Expanding on this point, we use LIFO accounting for our U.S. business. and can experience increased costs or benefits depending on whether we are in an inflationary or deflationary environment. The current inflationary environment resulted in higher costs accounting for nearly all of the year-over-year change. Said differently, excluding the impact of LIFO in fiscal 2025 and 2024, and gross margin would have been approximately flat to the prior year.

In terms of underlying business gross margin, we remain in a solid position. productivity headwinds in the quarter from optimization projects are being offset by efficiency and fixed cost leverage in our facilities, and we continue to do an excellent job managing price versus cost, including those costs related to tariffs. Given the importance of the topic, I want to underscore our view that over time, we plan to be profit dollar neutral with respect to ongoing tariffs.

We remain confident in this due to a few things. First, our region-for-region global footprint; second, nearly 90% of our goods shipped from Mexico, where our biggest exposure lies are U.S. MCA qualified and currently exempt from tariffs. And third, our pricing muscle, which is strong and supported by the high-tech value of our solutions and our ability to deliver reliably to our customers. In addition to managing price versus cost, our team has successfully managed operating expenses during a fluid environment, including with restructuring actions.

In the quarter, operating expense as a rate of sales improved to 18.3% and from 19.9% a year ago, a continuation of the positive trend we've seen all year. In terms of segment profitability, Mobile Solutions pretax profit margin was a record 19.1% up 80 basis points year-over-year due to the timing of inventory adjustments and leverage on higher sales. Industrial Solutions pretax margin was also a record at 20.9%, up 80 basis points due to leverage on higher sales. Life Sciences pretax margin improved to 5.3% from a negative 1.2% a year ago.

Strength in high-margin food and beverage and disk drive sales and leverage from an optimized cost structure across the segment more than offset continued investment in bioprocessing as we work to scale these businesses. Now I'll walk through the details of our fiscal 2016 outlook. First, on sales. We are projecting full year total sales to increase between 1% and 5%, with sales of $3.8 billion at the midpoint of this range. This includes pricing of approximately 1%.

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

In Industrial Solutions, sales are forecast to grow between 2% and 6%, driven by a mid-single-digit increase in IFS, where sales are expected to improve across all businesses, including strategically important areas such as aftermarket and services. Aerospace and defense sales are projected to be flat after cycling against record levels in the prior year. In Life Sciences, we expect sales growth between 1% and 5%, and from continued momentum in our larger legacy businesses, food and beverage and disk drive. We also project an increase in segment profit margin in fiscal 2026 growing to mid-single digits as a rate of sales and building on our momentum from 2025. For the total company, we are projecting full year operating margin once again at record levels and between 16.1% and 16.7%. At the midpoint, this is a 70 basis point year-over-year improvement driven by gross margin expansion and expense leverage. Our expected performance represents an incremental margin of approximately 40%. Our EPS guidance is $3.92 to $4.08 centered on $4 per share.

The midpoint of our top and bottom line guidance ranges represent 9% earnings growth on 3% sales growth, underscoring our ability to deliver higher levels of profitability on higher sales. During our Investor Day in 2023, we projected fiscal 2026 operating margin at the midpoint of our guidance range to be 16%, along with an incremental margin over a cycle between 20% and 24%. While our end markets have not behaved as expected, taking the midpoint of our current fiscal 2026 guidance ranges, we have more than delivered on our profit targets, demonstrating our strong commitment to margin expansion over time.

Importantly, our profit growth is about long-term structural changes that involve both subtraction and addition, meaning we are optimizing costs while investing in the most important strategic opportunities. Back to the fiscal 2026 outlook. Cash conversion is expected to be in the range of 85% to 95%, a year-over-year improvement and consistent with historic averages. Our cash generation, combined with our low leverage ratio gives us tremendous financial flexibility to invest for future growth and that is always our top priority when it comes to strategic capital deployment.

From an organic perspective, we're continuing to find new ways to penetrate new and existing markets through our R&D investments as well as capital expenditures, which are forecast between $65 million and $85 million and include key investments in new products and technologies across all of our segments. We are highly committed to expansion through M&A and actively work through a pipeline of opportunities, largely in our Life Sciences and Industrial businesses. While we have the capability and the commitment we are disciplined in our activities, pursuing opportunities with our strategic and financial criteria in mind. As we've demonstrated, the ongoing return of cash to shareholders as part of the Donaldson DNA and the value we create.

Our financial performance has allowed us to pay and increase dividends annually for decades and calendar year 2025 is expected to be no exception, marking the 30th year in a row of increases, allowing us to maintain our constituency in the S&P High-Yield Dividend Aristocrat Index. Further, in fiscal 2026, we are forecasting a repurchase of 2% to 3% of our outstanding shares. Through the strength of our global teams, technological expertise and deep customer relationships, we look forward to delivering for all of our stakeholders in fiscal 2026.

Now I'll turn the call back to Tod.

Thanks, Brad. Donaldson is the leader in technology-led filtration and we are strengthening that position. We have a proven history of focusing on our customers' needs through all market conditions and continue to advance our value proposition through our strategic initiatives and disciplined investments. The essential nature of our products for customers enables our razor to sell razorblade model which has penetrated across our business, fueling our durable, profitable growth today and for the future. Our success would not be possible without the talented Donaldson employees around the globe. I would like to close by thanking them for their dedication and service and I'm excited about what we will collectively accomplish in the future.

With that, I will now turn the call back to the operator to open the line for questions.

[Operator Instructions] Your first question comes from the line of Bryan Blair with Oppenheimer.

That was an interesting comment on ag demands being at trough or potentially moving off trough. That's encouraging to level set on that? When did ag orders bottom for your team? And what kind of growth are you seeing in the early part of fiscal '26?

Yes, Bryan. So this is Todd. When you really look at what ag has done, it's a pretty low comp. And so consequently, it's tough to imagine that it's going to fall further. Ag, we feel bottomed within the quarter because we did see some slight uptick, but we're not talking double-digit uptick or anything like that. We're talking low single digits, and we were encouraged the fact that has stopped falling.

Okay. Understood. In terms of the commercialization of your bioprocessing solutions, we know that the time line has been delayed relative to earlier expectations. How should we think about fiscal '26 progression and is there the prospect of growth inflection? And with that, can bioprocessing in isolation get to breakeven EBIT or potentially inflect to profitability this year?

So when you look at the total Life Sciences segment, our traditional businesses, they're doing quite well, performing to all profit expectations, et cetera. They're growing nicely, clearly carrying the day within the Life Sciences guide. When you then get into the upstream portion of bioprocessing, that's more muted, clearly troubled as capacity expansion, large projects, those still have not seen any kind of a turnaround, creating headwind in the business. Then the second piece of this would be of the bioprocessing story would be the downstream application piece where we're creating new products to bring those out to market to create revenue and growth in that fashion. That is taking a little bit longer to get those projects to market. We've made really good progress in '25.

We do not see the revenue expectation really with a high kind of a bounce in '26. That's likely more in the '27 time frame as we get through testing of those products and bring them to market perhaps as in the later part of fiscal '26. Some of those products have been released. You saw those kind of announcements with our Purexa type of a brand as well Isolere Bio has also released some of those. But we still have more to release. And so you bake all of that into the Life Sciences guide, and that's where you see the mid-single-digit growth and where it's coming from.

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

So first-fit within that business is a bit mixed by region. The U.S. and Europe continue to be strong. APAC is a little bit more troubled. LatAm is certainly troubled. But it's really a replacement part story at this point in time for us because we continue to gain share as a result of our strategies, good execution. We do expect the U.S. to hold, and we continue to take first-fit share. But really, it's largely a replacement parts story within that business. Replacement parts were up broad-based across our industrial sector and particularly within IFS in multiple regions.

Bryan, this is Brad. I'll add one point is that I think what's encouraging about our plan is that it's also broad-based across the different businesses within IFS. It's not as though the IFS growth is predicated on one business really hitting hard and then everything else is loop warm. We expect this solid performance over the course of the year across all these businesses.

Your next question comes from the line of Nathan Jones with Stifel.

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

So first, we have to get our new product development across the finish line, be able to really produce that at scale that the customers really would like to see. We're in laboratories with tests. All of our products are very well received. They really love them. And we're just finalizing the development of being able to sell those at scale, making sure we have GMP manufacturing capabilities. And it's -- so those later phases of getting it ready for production is kind of where we are. We've got to finish that off, and then we should be able to see some market pickup. But overall early returns as far as the capabilities, the differentiation, the disruption that it could cause are really positive. But when we see the growth, it will be likely more in '27 where we really start to commercialize.

I guess the other question I wanted to ask about was on the connected side. I think you were talking about 30% increase in the number of connected products in dust collection that you have out there. I mean are we talking that going from 3% to 4% or 30% to 40% connected? And then I guess a follow-up question to that is, how do you monetize that? Is this something that you can monetize on its own? Or is this kind of value that's provided to the customer that results in pulling more hardware through rather than like a subscription model or something like that?

Yes. So Nathan, it is not a subscription model. It is really deepening the customer relationships to be able to have them really manage their equipment more efficiently either from energy savings and giving them more uptime. And then that deeper customer relationship really allows us to do more business with them on a per piece of equipment basis in all of the replacement parts as well as services.

And we have proven with the thousands that we have connected that we absolutely increase our replacement parts activities when we connect a piece of equipment versus a non piece of equipment. You see that as 1 of the drivers. There were years ago where our IAS business would be more 60% to 65% first fit and then 35% to 40% replacement parts. Today, we're at 50-50. So you can see how that replacement parts of that connected-based products is really helping us mix that particular business profitability up and that's the importance of that strategy.

Great. That makes perfect.

Your next question comes from the line of Brian Drab with William Blair.

What you guys have done with the margins over the last 4 years is pretty incredible. And I'm just wondering, can you talk about a little bit further about how you get 40% incremental operating margin in fiscal '26 after such strong incremental this year is going even higher. Maybe to start there, and then I have a follow-up.

Sure. Brian, this is Brad. First off, if you just pick the midpoint of our op margin range, 16.4%, that's about 70 bps up from prior year. The largest portion of that is coming from gross margin expansion, and then we are going to get some expense leverage as well. Given the more muted sales environment that we're dealing with, we're continuing to push for a structural -- to benefit from the structural cost reductions that we had this year. So we'll expect expenses to stay very under control. And then the gross margin is bouncing back a little bit from the LIFO that I mentioned, but we're also able to -- we do expect to offset the tariff impact. Price versus cost will remain okay for us. And then on top of it, it's -- as we get through some of the footprint work, we're going to start lapping the heavier lift there later in the year, and that will give us a little bit more of a tailwind. I'm talking basis points here. I'm not talking points. But overall, the formula for that incremental, I think, given the environment is pretty positive. And obviously, we're celebrating that a bit, too.

How do you expect it to trend throughout the year, the operating margin? Is it going to be moving up throughout the year? Or is it a big step up in the second half? Or how does it look?

Yes. We'll continue to move -- we'll continue to step up over the year. And then one thing, just to give some perspective on how to think about it in terms of the semester, we often talk about our sales being tilted towards the back half. It's kind of a 48-52, 49-51. I can tell you, profit margin is typically more tilted than that. So by several points difference where the back half is going to generate more profit as we get a little bit of a sales pickup and then leverage fixed costs as well.

Okay. Now in a situation where you hit the midpoint of the guidance, you mentioned 1 point of price, so that would give us like 2% volume growth for fiscal '26. how does that look in terms of a progression throughout the year, the growth rate is -- can you talk about what growth rate you're expecting each quarter?

Yes. I would say you can look at a 2-year as a bit of a smoothing mechanism, but it looks in fiscal '26, that quarter-by-quarter percent increase looks much less dramatic than it did in fiscal '25. In terms of volume versus price, we're actually fairly consistent with pricing quarter-by-quarter. There are some moments where as we implement new pricing, we typically do in certain markets in January. So there's a little bit of a step-up there. But overall, it's -- that's much more muted. The variability then comes from volume, tends to come from volume.

I guess I didn't really understand the first part of it. Like is there a chance that you're going to see like one -- like a first half of the year that's flat in the second half, up 4% in terms of volume? Or is that 2% pretty smooth throughout the year? I'm sorry if I missed.

No, no. It's okay. It's plus or minus. But again, I would point you back to the 48-52 ish for the sales mix. That will get you where you need to be.

Yes. Understood. Okay. I'll pass it on.

Your next question comes from the line of Laurence Alexander with Jefferies.

I guess, first of all, just near term on demand. Can you give a little bit of detail on what you're seeing in China and the mix there aftermarket versus first-fit now? With respect to the commentary on backlogs, can you characterize how current backlogs compare with, I don't know, whatever you view as like typical? And then I have a longer-term question.

Sure. So hitting those 2 real quick. So China incoming orders are up. Obviously, much easier comps. We're pleased to see some positive economic progression there within the quarter, but we also remain cautious, a little bit cautiously optimistic with China and is China going to be strong going forward? Not sure. So we're a bit more careful on the outlook of China. Our team continues to execute real well there. We continue to win new projects. And so we continue to be optimistic, but also very careful. Relative to overall company backlogs, I would tell you -- our backlogs support the guide. We feel very comfortable with that. Also very important is our late backlog as a percent of sales are now below pre-pandemic levels. And that really is the reason for my comments in the opening remarks, congratulating our operations team who just had a fantastic year taking care of our customers and helping us grow our business.

And then with respect to the margins, I want to see if I can frame this in a way that you'd be willing to nibble on or answer somewhat. If you think about the parts of the business that have the weakest end markets currently, can you characterize their margins relative to the rest of the company? And really, what I'm trying to get at is it's been quite a while since we've seen multiple years of decent end market demand. If you did get 3, 4 years of decent end markets, not sort of red hot, but decent, is it reasonable to think that your margins for the overall company could move into the low 20s given the incremental margins you've been consistently posting? Or is there anything structural in your mix that would be an obstacle to that?

Laurence, this is Brad. So I'll nibble. I think the first thing is the composition and the stratification of margins is important. It's no secret, we've talked about it for a very long time. In the spectrum of our businesses, OEs tend to have a lower gross margin rate than the rest of the company. So to your question, as we expect that those will rebound at some point, we don't know when. Hopefully, we are at this bottom level we've talked about. But that would create some mix pressure within our gross margins. But at the same time, we feel like we're in a very good position with our structural costs and things like our footprint optimization, consolidation of plants, all of this gives us a chance to leverage more aggressively than probably we would have in prior periods before this work was done. So I'm not going to peg it to a number, but as you talk about 20s, it's for us, the idea of continuing to expand our operating margin is absolutely alive and well.

Your next question comes from the line of Angel Castillo with Morgan Stanley.

Congrats on the solid quarter here. I was just hoping we could expand a little bit more on maybe the kind of quarterly or first half versus second half cadence. I know you talked about ag and some of the other kind of puts and takes within some of their segments. But if we could kind of go subsegment, Off-Road, On-Road, IFS, A&D, just how you think about each of those kind of first half versus second half? And where you're kind of seeing already fiscal 1Q type of trends in line with guide and where you kind of anticipate a little bit more of a second half pickup and kind of what drives that confidence?

Angel, this is Brad. I'll start. If we think about the first-fit markets, I really do want to reiterate a point Tod made earlier. It's not as though we're expecting some remarkable change in the markets. So if you think about it from -- over the course of the year, we would expect it to get better. That creates maybe more outsized movement in terms of the year-over-year increase, especially with On-Road, just we said high single digits. And I just want to point out, high single digits is millions of dollars, not tens of millions of dollars given the relative size of this business. So I think that's an important part as we look through the year.

Just kind of smoothing it out, again, I'm kind of a 2-year stack person with some of these OE businesses because the comps have been noisy. Another one you brought up is Aerospace and Defense. And if you look quarter-by-quarter this current year, that was a very lumpy business due in part to orders, due in part to our ability to fulfill with our supply chain and more supplier constraints than ours. So that creates a little bit more of a dynamic approach by quarter. But I think as you're thinking about the total company settling into what I said earlier -- in an earlier question about that 48-52 is an important starting point.

That's helpful. And then I wanted to go back to maybe capital allocation. Could you give us a little bit more maybe update or thoughts on kind of the M&A pipeline and just your appetite for buybacks kind of beyond the 2% to 3% of shares outstanding? And then just on CapEx, your guidance, I think it implies kind of a decline year-over-year at the midpoint. Can you just talk about what kind of the factors that are driving that? And maybe what this -- how should we kind of read this from an organic investment opportunity and as well as kind of potential benefits from OBBA or other kind of assessments of what that decline in CapEx means?

Sure. This is Brad again. I'm going to start, and then I'll let Tod pick up on the M&A side. But as far as CapEx, if you think as a rate of sales, we're in that 2%, 2.5% range, fairly consistent. I would say, like we're talking about with lots of our customers, we're being very smart and sharp with our prioritization so that we're not introducing a lot of projects at a time where the world is still a bit more uncertain. So for me, I wouldn't read too much into that. It's more about we snapped the chalk line higher on the list of good ideas versus lower on the list. Should things loosen up, obviously, we'll make sure that these are the right investments.

Share repurchase, obviously, last year, we juiced at around the 4% level. And I think for us, it's about always having a balance. So to the extent that we can keep dry powder for possible M&A and continue to give cash back to shareholders, that's it. There's nothing real precise about that calculation as much as it's an ongoing conversation that Tod and I have as we think about how to best use our money at the time. So the 2% to 3% is much more of a normal. That's kind of where we started last year. We're typically in the 2-ish percent range. And again, I think this is about starting the year with more of a normal position.

And then just, [ Billy ], on your M&A question. So our capital priorities have not changed. They remain invest in the company for organic growth, buy companies, so take care of and continue to invest for inorganic growth. Dividends and then share buyback. And then -- so we still have an appetite for M&A. We still have a strong balance sheet that allows us to do that. We still have teams working on that. We have a very good pipeline. It's obviously strategic and focused, and we continue to work on that and we'll continue to do so as part of our ongoing strategy.

Your next question comes from the line of Tim Thein with Raymond James.

I had a question first on the aftermarket business, specifically in the mobile segment. And Tod, you mentioned the high utilization rates as one of the kind of the sound bites there. Can you maybe go a little bit further in terms of -- in the outlook? I mean, if you go through some of these markets, and obviously, it's a global company, but in your largest market in North America, we've been depressed for some time on a first-fit basis. I'm just curious in your outlook in terms of by segment or as you look through the different channels, what you're hearing from dealers, from customers in terms of just kind of the underlying change in activity? Is it a stocking level? Is there anything that you can expand a bit further in terms of what's kind of driving your outlook for that part of the business?

Sure. If you look at our Mobile Solutions aftermarket, remember, 40% of that business is OE and 60% is in the independent channel. In 2025, the year we just finished, our OE business, had a bounce. They were really restocking, if you will. And our independent channel was a bit more muted. Going forward, given the share gains that we have in the independent channel, we're very proud to have hit $1 billion within that segment last year. We do have share gains that we baked into our forward look. We would expect more of an increase on the independent channel than the OE channel in '26. That's what we baked into the guide. So they're kind of different timing on each other. But you wrap that all together, we're still gaining share and still would expect to grow that business, particularly in the U.S.

Okay. And I'm guessing you don't want to get too fine aligned on this. But is the opportunity with Mighty, is it in a similar kind of -- should we think about that in a similar ZIP code in terms of the benefit from NAPA? Or any help on that?

Sorry, we're not going to give you any help on that. We're just proud to have them on board and actually having a strong relationship building with them, we're really not going to guide on a single customer going forward.

Okay. Last quick one, Tod, just on the -- you mentioned this power gen super cycle. Any comments there in terms of backlog coverage? Is that getting to the point where you're starting into conversations? I'm guessing you're booked further out than normal. Any color just on that piece of industrial?

Sure. That business is full, the capacity. We could probably sell if we had more capacity more. But within that business, those projects are difficult to execute. And so we remain very focused on executing. We do not see an end in sight. There has been no indication of the super cycle cooling at all. And so we're really happy with our position. The customers are happy. We've been delivering quite nicely. That just continues at a minimum through this full fiscal year. And you're right, we have a very long -- well, it's probably the longest look on backlogs in the company at this time.

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

Your next question is from the line of Brian Drab with William Blair.

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

Yes, as well as other share gains as well. It's not just a single customer there. The team within our Mobile Solutions aftermarket organization is doing excellent work. They continue to expand Donaldson presence, take care of the customer, win important customers. They're just doing a great job, and we're benefiting from it, and we baked that into the guide.

Your next question comes from the line of Tim Thein with Raymond James.

Sorry, last one for you. Tod, maybe it was a quarter or 2 ago, you were kind of skeptical or you pushed back a bit on this notion of a potential reshoring, reindustrialization and large project surge in North America, not surge, but pickup. As you talk to customers, is that kind of big project quoting pipeline, have you seen any change in either direction on that? Or has the tone of your customer conversations changed at all?

My tone doesn't change. I would say our teams, particularly the sales teams within first-fit equipment in the U.S. with -- for our Industrial segment is doing excellent. We did have nice growth last year, particularly within the dust collection side of things. We expect more this coming year. The quote backlog is solid. Things have not abated at all. But I would also say it hasn't really accelerated to a notable degree worth mentioning here. It's just -- we're doing a good job. We've got good products. We've got good people to take care of the customers, and we're executing quite well, and we're very proud of that.

That concludes our question-and-answer session. I will now turn the call back over to Tod Carpenter for closing remarks.

That concludes today's call. Thanks to everyone who participated. We look forward to reporting in about 90 days, our first quarter results. Have a great day. Goodbye.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.

Okay. We'll go ahead and get started. Thank you all for coming to the Donaldson presentation. I'm Brian Drab, the industrial technology analyst at William Blair. I've covered Donaldson for 17 years now. So today, we're happy to have with us CEO, Tod Carpenter; CFO, Brad Pogalz. It's not Pogalis, Pogalz. Okay.

Pogalz.

See every detail, and I blew one of them. And Sarika Dhadwal, who is the Senior Director, Investor Relations and ESG. So thank you all for coming to the presentation.

Donaldson, as many of you in the audience will know, is a world leader in filtration, specifically in engine markets, heavy-duty engine, on-road and off-road, also many different industrial applications. And most recently, the company, over the last few years, has been expanding their presence in the medical, bioprocessing markets, and we'll get an update there.

Of course, that's a very challenging end market right now. Everyone who has exposure to life sciences has been having some challenges. So maybe we'll have some questions on that. I know it came up on the earnings call. But at this point, I'll turn it over to Tod. Thank you very much for being with us today.

Thanks, Brian, and thanks to all of you for being here. We want to start, of course, with our forward-looking safe harbor to satisfy all the lawyers across the world, I suppose. But we are in an enviable position right now, having reported earnings on Tuesday, typically. We have to always reach back a number of months, but all the information then we'll talk about today is very fresh. So that will be a very nice timing. Five key points that I want you to take away from this presentation and about our company.

So our strategy is to be a technology led filtration company. We are a leader in filtration around the world for all the markets that we serve. Second, we have best-in-class technology where we solve very complex customer problems, which gives us deeper relations to the customers. And that kind of relationship is very important in our company model. Third, those customers are global in nature, and we are everywhere that the customer wants us to be, particularly important in this time of tariffs, and we'll talk a little bit more in the presentation about that, that we have a clear strategic growth strategy. It's very balanced organically as well as M&A. We'll talk about that.

And then [ fifth ], we are progressing toward life sciences type of business where our products that we are inventing organically to go into there as well as the M&A, the acquisitions that we have done our differentiated products. They are also disruptive products that we bring into those spaces.

So specifically, Donaldson is a 110-year-old technology-led filtration company. You see our revenue breakout in the lower left. We have 3 reporting segments: Mobile Solutions is 62%. Industrial is 30%, the balance is Life Sciences. Very importantly, we sell proprietary razors to sell razor blades. We do it through our filtration businesses. We do it in every business that we have. And therefore, roughly 68% of our revenue is razor blades. The balance being first-fit or in our Industrial based businesses, we would say that would be first-fit equipment using our proprietary filtration technologies.

Our overall results, you see each of the last 4 years there, we continue to grow. Everything you see with regards to revenue and adjusted earnings per share are all records for each of the prior 4 years. When I say we are a technology-led filtration company, you say that we have over 3,000 active patents between our Investors Day in April of 2019 and our Investor Day of April of 2023. That means somewhere in the world, on average, Donaldson was granted a patent every day. We're serious about our strategy. We continue to invent cool things. I often say, I should be wearing a black turtleneck, but that gig has been taken. We really have some cool technologies within our company.

Very important in this time of tariffs. Our particular model has 44% of our revenue in U.S. and Canada, 28% Europe, 10% or so -- 10% or 11% in Latin America and 17% in Asia. Important is that 75% of all of our revenue is built within the region that it is consumed. That gives us a really good advantage within a natural hedge of the tariff activities going on and obviously, the constant movement of that. We are able to shift quite nicely. The U.S. is a net exporter for Donaldson Company. We have roughly 150 locations around the world. We have about 65 manufacturing plants. They're in every region of the world.

And so that allows us from a supply chain standpoint of view as the economics make sense to shift from 1 region to the other to build it if we are not completely in that region. And so we have a nice way of moving that 25% around. It's the reason why on Tuesday, we said that with the current tariff situation, what's implemented the headwinds that we have in the company are about $35 million roughly, and we have ways to offset all of that either through supply chain, pricing, we'll use surcharges, et cetera.

So relative to tariffs, our story is pretty straightforward. We feel pretty comfortable that we can offset it all. The one thing we do want to mention with that is we're looking to offset the dollars, that doesn't mean we get profit on tariffs. So there will be slight gross margin pressure as a result of that, obviously, because you're not able to roll that all the way through. We are with tariffs looking to have very fair relationships with our customer base. It's working out quite well so far that as a company, we're able to flex quite well so far with everything that's taking place.

Along the bottom, you see our end markets, how we really are comprised within our business units and the split within each of those business units are first-fit or, say, proprietary first-fit and then the lighter blue is the replacement parts. Here, you see our financials and giving -- including the guidance that we have out for this fiscal year. This fiscal year expects to turn with 1 quarter remaining, so we are through 3 quarters of our fiscal year just reported on Tuesday of this week, which means 1 quarter left. We fully expect to have record revenues and record earnings this fiscal year yet again. You see all of that.

Our adjusted operating margin is -- for this year, is 15.8%. We have given guidance for fiscal '26, which would be next year, early guidance that our midpoint is to get to 16.2%. We continue to expand our operating margin as you see here over a number of years. We will come out with guidance at -- when we give the full year report here in about 90 days. Again, we are the filtration leader with many durable competitive advantages. We have a long history of filtration technology leadership, as I talked about.

We do have the deep customer relationships. You see the balance, but I do want to emphasize that we have best-in-class operations. We are everywhere that the customer wants us to be. So that's -- we get close to them when we have the volumes necessary. We expand our manufacturing footprint or do what's necessary to get that customer taken care of, and we're very, very proud of how we go to market that way. And that allows us, one of the many reasons, technology as well as deep customer relationships to have a high aftermarket retention that you saw at 68% on that first slide.

We have 3 reporting segments: Mobile Solutions, Industrial Solutions and Life Sciences. The Mobile Solutions is medium and heavy-duty diesel engines, construction, mining, agriculture, long-haul trucks. That we have been the traditional -- that's how our company started. We've been the traditional leader in that particular space. We remain the leader. We are working on alternative fuel solutions with customers. Recently, we announced that we have won the fuel cell program at Daimler, for example, where we'll help them do all the filtration.

Now it's interesting to understand on the alternative fuels, if you're moving away from diesel fuel oil, and let's say you're going to go to hydrogen, there's 2 ways. You can do it in a fuel cell, you can do it as the combustion engine portion. Either way, you still need air filtration. And the fuel itself actually has to take particulate and water out of it, which is exactly what you do for diesel fuel, and we are best-in-class to be able to do that. However, there's also a third need particularly in fuel cells, and that is you have to take out some of the other concentrates such as sulfur dioxide or mercury because you need more of a pristine type of a fuel, especially on fuel cells. We are excellent at that.

We've been doing chemical absorption within other business units within Donaldson for decades. So we can tailor make that for the particular customer, and that's the reason why we've been winning in the alternative fuels relative to hydrogen. It's very important to really understand that not all fuel cells are exactly the same. One customer fuel cell may have to have sulfur dioxide, but the others may take -- may be more susceptible to a different type of a contaminant, and so we'll be able to absorb that out for them. So it's -- it's very broad range type of spectrum.

Good growth opportunities within the Mobile Solutions opportunity segment. We're growing very well in our aftermarket business as we reported this week, we are low single-digit growth even in an environment where a lot of our first-fit vehicle end markets are -- have headwinds.

They're a bit troubled at this point. We continue to grow in the Mobile Solutions space. In Industrial, we have a number of different applications within that space. What we are doing, if you have a process where it's an industrial dust, a mist or a particulate of some sort, we will filter that out for you to either make your environment better, have the machine protected, anything that you need. And additionally, we have a power generation business inside there.

So think of base and peak load power stations, oil and gas type of power stations all around the world. We filter out the ambient air, make that proper. So the gas turbine can actually do its job and create power in the national grids around the world all the way to industrial hydraulics and a number of other diverse businesses in that particular segment of industrial. It is growing nicely.

It also has a good operating margin of 18. Our strategy within that segment to grow it is to digitize it. So much like you have seen in a car with OnStar, we now have when we send your dust collector out, we now have it when you turn it -- plug it in, it will actually tell how it's operating back to Donaldson Company, and we can call the maintenance person and say, "hey, go do this to your dust collector, so you don't shut down your production." It's really giving us, again, deeper relationships with the customer.

You're seeing our aftermarket business grow there. I would tell you, as much as 7 or 8 years ago, our aftermarket in that business used to be about 30%. Our first-fit was 70. We've gotten good momentum with this strategy. Now it's about 50-50. So you can see our aftermarket business is really going quite well within there, and we expect good things going forward to help us drive growth within that segment.

Within Life Sciences. Life Sciences, we entered that segment as a new segment that's small for our company, $250-or-so million. We like the space because of the difficult challenges of filtration that the space actually allows us to help solve for our customers. We are not going in on a me-too type of a basis. We did do acquisitions. We did pre revenue-based acquisitions. We also have some really cool inventions in our laboratories.

Each of those will be rolling out over time in order to grow it. As we entered that space, that particular market did start to create some new headwinds, particularly on the bioprocessing side, you see that within those end markets. It's going to take us a little bit more time than we had hoped for sure, to be able to grow into that particular space.

But make no mistake. We really like the space. We like what we're bringing forward. We really have some differentiated products, and we'll be talking more about that here in the months and quarters to come.

Here are the acquisitions that we have done. Our addressable market in Life Sciences large $21 billion, traditional Mobile Solutions segment, we are roughly about $2.2 billion to $2.3 billion currently in revenue of the $14 billion in that segment.

Again, that segment likely could grow if hydrogen goes to be the winner in that space, and that looks to be more the direction that, that particular market is heading. Within Industrial Solutions, it's $15 billion, we're about $1.2 billion to $1.3 billion within that space. You see the 5 acquisitions that we have done across the Life Sciences space. Our most recent one, Medica out of Italy, where we now own 49%, brings a brand new technology to our company. It's called hollow fiber membranes.

If you think about your hair, your hair is about 10 to 15 microns in diameter. What this does is give you almost like an extruded straw, if you will, kind of oversimplifying this. And it's important to understand the wall structure, the pores of that wall structure. Your hair again, is 10 microns will be 0.2 microns in order to be able to get into the bioprocessing spaces and help with the drug applications. That's why we bought it. It's another really cool technology add to Donaldson Company, and we're really excited about the future that, that can help us bring for our company.

As far as balanced capital allocation, our first priority is to invest back into the company organically and through acquisition. Third is dividend. We raised our dividend this week -- or sorry, last Friday by 11%. It is the 30th year in a row we have raised our dividend. We are a proud member of the Dividend Aristocrats fund. That means you have to have raise your dividend 20 years or more in a row. As I said, we are at 30 years. Dividend is very important to us and for our shareholders. We continue to prioritize that. And then the fourth one is share buyback. You can see our -- how we've used capital over the last 3 years for share buyback. Important to note that in this quarter, we did -- we ended the quarter at 0.9%. Roughly 1% of shares bought back. Our guidance was midpoint, 2.5% on the buyback.

As we stand here today, based upon what was going on in the last quarter, we saw opportunity. We took it. We are now at 3.3% bought back. So we were above the guide. It just made sense for us to do that. Yes, that means I feel like the company was undervalued and so we did it. And looking forward, we gave a guide of between 3.5% to 4% as far as share buyback. But again, we'll invest back in the company organically. We'll buy companies through M&A, dividends and then share repurchases. Those are capital allocations. And over the last 3 years, we gave -- we allocated $1.4 billion in that fashion.

When you look at our balance sheet and you look at the model, what it brings roughly, our debt ratio, we like to operate at about 1. Today, we sit at about -- in the neighborhood of about 0.8. So we're in a strong position there. Free cash flow of roughly about 85%. That's right about our guide today. And we have available to us $800 million worth of capital, which means that we can be an acquirer of choice. So on that acquisition piece, we still do look for targets that we continue to work across our strategic pipeline and feel very good about.

So again, going back to the 5 points. We are a leader in filtration. We are best-in-class in technology. We've got a lot of really, really cool things. We do help our customers solve very, very complex problems for themselves. And we have a good strategic and clear balanced growth plan and we are progressing into the Life Sciences segment, a little slower than we would want due to the end market moves, but we still love the space and what it can bring to our company. So with that, I will open it up for questions.

Yes. Thanks very much, Tod. And it's great to have you here, Brad and Sarika, of course. But Brad, I'm looking at some of my notes from Donaldson from 10 years ago and conversations that we had. I don't know if you, Brad, just want to -- I know that the investment community at large is familiar with you and you joined -- took the CFO role on recently, but some of my clients might not know your background. Do you mind just saying a couple of things in the opportunity from your perspective as well?

Yes. I joined Donaldson 10 years ago. I started as Head of IR and the role Sarika has today. I was in that job for about 5 years. I moved during COVID to Belgium to head up and be the CFO of our EMEA finance region. And so I was there for the last 5 years. During that time, I also took on Global Head of FPA for the company. And then in the last -- I was named CFO and took over First of November and now here since.

So opportunity, I do want to take a moment on that. The thing that impressed me about Donaldson when I joined and continues to be part of our conversation is what Tod said about technology-led filtration. So I think when I came on, it was a retail background, and I really didn't realize where all the filters were in the world, and I thought about my furnace in my car. We don't sell on any of those things. It's low tech.

We make different choices at the company. And I think what gives me a lot of optimism and part of where I'm happy to be in this chair and grow more with Donaldson is as the world gets more complicated, regardless of what happens with AI or robots and manufacturing, these things still get manufactured or equipment is still moving around. So with complicated problems in the world, there's more need for filtration, not less. And I really do think that creates an exciting opportunity for us as a company.

Even robots need filters, It's a beautiful thing.

Do you want to elaborate on that, Tod? Even robots need filters, you said.

They have to have vent filters because they actually breathe relative to how it operates. So there's a lot of venting applications across a lot of the machinery that you see, particularly like EVs, for example, headlamps, a lot of different applications, and we do that extremely well.

In a conversation that you and I had this year, you were talking about margin expansion potential in longer-term margin potential. And you said some -- I don't want to put -- I'm not going to say a number, but can you talk about what you see as the long-term margin potential? Where can operating margin go for Donaldson over the long term and why?

Yes. So we're currently coming out this year at 15.8. I think 5 or 6 years ago, we'd have been down at 12, high 12s, maybe something like that. Our Investor Day, we set a target at 16. Clearly, next year, we'll be above 16. We have programs in place to continue to expand our operating margin, 17 is clearly in sight. We have a path to be able to get to 17. And then you say, well, okay, well, how about 18, it's a sure and so we do believe we'll continue to expand our operating margin. It will take time. We're not going to just go cut the middle out so hard that we get the operating margin and hurt the company. That's not the way we do business. We do take our customer relationships very, very seriously, but there's obvious efficiencies that we can gain.

For example, we're currently shutting down 2 manufacturing plants, 1 in England, 1 in California. There are other opportunities to really help optimize our footprint. There are other efficiency plays that we have. Important to understand that our company is now 97% of our revenue goes through one business system. So we've gone through all of that metamorphosis.

The only thing that really isn't done right now is Brazil. It will go live later this calendar year, maybe January or so. That means we'll be 100% on the business system. That allows you to take this distributed model of certain business processes and centralize them, wherever in the world you want to centralize them in order to become more efficient and control processes and drive cost reduction as well as now pricing-based models that we have coming out of the supply chain situation.

We have really done a good job at resetting all the pricing activities in the company. And now we have a much fairer relationship with our customer base, and that's how we talk to them and really embrace that challenge collectively. We are not trying to maximize our overall pricing with the customers, we're just trying to optimize it because remember, every razor blade we sell, we get the razor -- every razor we sell, we get the razor blade.

And so that's an important type of significance to that. So we're trying to optimize the overall gross margins and the pricing with fair relationships with customers. But we use all of these macro-based opportunities and you roll it all up, and we clearly have room to expand our operating margin, and we will.

And on that pricing note, one thing that has happened at the company, and you correct me if I'm wrong, but for the 2008 to 2020 period as I was following the company, it seemed that every year, for most of your business lines, especially on the engine side, it's kind of prices down 1 point. How do we become more efficient in the operation to get that back. But that's different today, right? And this is one of the things that, from my perspective, gives you that potential to...?

Yes. When -- we're a 110-year-old company, and so we got our beginning in many of the large OEs in construction and agriculture and mining and those relationships had gone a little bit more to the favor on the OE, whereby we would start every year with the price down. So we would start negative 1 or negative 2 in business segments and have to make that up with cost reduction on an annual basis.

In the supply chain disruptions, that was just not tenable for anybody, for them, for us. And so consequently, we were able to get rid of all those clauses, make all those contracts reset and really now have a much more fair relationship.

And in fact, we get price increases on a number of those particular relationships on an annual basis. Now as appropriate based upon inflation and all the rest. So it was a massive undertaking for the company. The company now has, I think, a lot more confidence in our relationships with our customers that they're more fair and proper and really set for a long-term opportunity.

Yes, I just think that's a huge structural change in the business that really is important going forward. If there are any questions from the audience, please raise your hand. Otherwise, I'll ask a couple more. We have 4 minutes here. One of the other things that you talked about earlier this year in a conversation with me was the potential for some of these end markets that are under pressure right now to bounce back, like we've seen in the past when the engine market comes back, it's not up 5%, right? What do you see for these businesses over the next few years?

Well, it's actually simple straightforward. I'll just go back to this 1 slide here, okay -- clear. Okay. That's what we've done in the last 4 years in spite of the fact that our major end markets have headwinds. Construction, agriculture is legendary. You hear it from John Deere. All of those people are our customers. It continues to walk down. over-the-road trucking, just walk down again in the last 90 days. They thought it was going to be between, say, 250,000 and 300,000 trucks. Now they're more down to between 200,000 and 250,000 trucks from a year or 2 years ago, roughly 330,000 trucks. That's a significant market for us. That's down. Every one of those OE markets, those first-fit vehicles and the equipment build right now are down. And yet our company is performing like this.

So my point to Brian is when those markets bounce, they don't bounce low single digits, they bounce double digits and sometimes over 20. So that's what gives me confidence that we'll leverage even more to the operating margin when we get the volumes back on the first-fit side of our company. Our gross margin will come down a little bit because of mix, but the overall operating margin will go up because we'll leverage that through the organization.

It gives me confidence that we can expand our operating margin and that our company is an excellent, excellent shape to take advantage of that next economic upturn around the world.

And one of the reasons that those results have been so resilient is that you have such a strong aftermarket revenue stream, right? We've talked about this over the years. There's sometimes an impression that on-road truck is going to be -- is weak, so that -- it's 3% of your revenue, though right? You have 60% plus of your sales in the aftermarket, which also are somewhat higher margin products as well, too.

So the other important piece about our company and a lot of people will tag a particular end market and say, wow, that one's down. So your company is going to have a little bit of trouble. The diversity of our -- of the businesses, the portfolio of businesses that we have in our company give us some natural hedges on some of that activity. If you take a look, our company is growing and yet we have multiple end markets facing headwinds, right?

Why? Because we have other ones that don't have those headwinds and they're doing really well, power generation being one that's helping offset some of those kind of activities. So the diversity of portfolio really helps us go forward and gives us confidence that look, our company is going to be less cyclical. We work very, very hard to make our company less and less cyclical coming off of 110 years, and that's work that will never end for us. But we're doing okay from that perspective, I would say. I'm a little biased.

Great. Well, we're just about out of time, so I think we'll wrap up. Thanks very much, Tod, brad, Sarika. Thanks for coming here.

Thank you.

Thank you, everyone.

Thanks, everyone.