Donaldson Company, Inc. Aktie

Okay. Thanks, everyone, for joining us for those who don't know me, Angel Castillo, Head of U.S. Machinery and Construction here at Morgan Stanley. Appreciate your time and appreciate Brad Pogalz, CFO of Donaldson as well as Sarika Dhadwal, Head of IR at Donaldson, joining us today. Thank you both so much.

Happy to be here. Thank you.

Yes. Maybe before we just get started, just a quick disclaimer for important disclosures, please see Morgan Stanley research disclosure website at www.morganstanley.com/research disclosures. If you have any questions, please reach out to your Morgan Stanley representative.

And with that, Brad, if we could just dive right in. I think the best place that I was hoping we could kick off the discussion is just you've been in your seat now for nearly 2 years, and Rich has also been in his seat now CEO for a little bit. Just can you talk about how the strategy has evolved or changed now that Rich has had more time and yourself to kind of settle into your seats and really absorb where the business is headed and whether you decide to make changes on the strategy. Where do you see the opportunities to invest, to optimize, to change the direction, if at all, if you could just talk about that.

Sure, sure. And maybe a bit of the background on it. I've been with the company for 11 years. Rich has been with the company for more than 20. So one thing with the strategy. Rich has been a direct report of the CEO for decades and definitely had a role in this strategy. I think what we're really optimistic and encouraged by is that our strategic priorities are largely unchanged how we execute them and some of the focus areas, which I'll go to are things that we're going to evolve. But as far as where we sit today, Donaldson is a leader in technology filtration.

We have an underpinning of capabilities that gives us access to lots of markets using the filtration know-how, and then availability and scale and customer relationships are a core part of how we drive value. We're in good markets. So it's about continuing to look for those opportunities. The evolution, I think, is going to be on our portfolio and analysis and really the granularity of how we get into things. So as we think about the next 5, 10 years for the company, it's about ensuring that every business has its role in the portfolio and everybody -- every business earns its place in the company. Some of that looks like classic prioritization work, 80/20 and really managing long tails of things, focusing on the regions that make the most sense for the specific markets that we're in.

The good news is Donaldson touches pretty much every corner of the economy. So our access to the world is very high, then it's about prioritizing choices within that. And I think a combination largely organic growth, but also inorganic as we look for opportunities like the recently acquired facets and getting more into aerospace and defense, making sure that we dig deeper or go deeper into the markets that are exciting for us.

No, that's very helpful. And I think -- I mean you put it next year, right, Donaldson touches every aspect of the economy, and I think that's with so much macro volatility. That's 1 thing I wanted to ask about, right? A lot cross wins from early sense of cyclical recovery with PMIs, et cetera, as well as just challenges around macro with interest rates, geopolitics. So can you just remind us with so much exposure to the broader economy, like ultimately, what are the factors or the aspects that you're watching most closely that are going to ultimately dictate or that are more important to track in terms of real implications to how your business ultimately performs.

Sure. The place to start on this that I think is important for the group is the composition of the company. About 2/3 of our revenue is recurring revenue. So a version of an aftermarket part across 3 segments. In our mobile solutions, things we watch are any measure of activity. So think about freight index or truck miles driven farm activity, anything like that, that helps drive aftermarket, which is about 80% of the Mobile Solutions business. and then new equipment production.

We are in ag, mining, construction and transportation. So to the extent that new equipment production is going up, that favors us well. And of course, right now, as probably everybody knows, it's looking better than it has in a while across all of these markets, especially with ag and transportation. In the industrial space, again, any unit of activity is important. So IP is a very good measure that we tend to watch. About 50% of our industrial segment is some recurring revenue.

And the places that I'm really focused on right now are more the cap goods and the project side. What I do want to delineate though is you almost have to look at our industrial businesses as data center versus nondata center right now. The data center side, things like power generation are doing very, very well. and we all see that. And then the other part of the business, new projects and new factories, brownfield, greenfield, those are the places that, again, look for industrial CapEx.

That's very helpful. And maybe if we could -- you touched on it a little bit, but I guess hoping you could dive a little bit deeper into ultimately how the business was so much aftermarket tends to perform in a cyclical recovery. As you think about specifically the Mobile Solutions business to the extent that you do start seeing more first fit, what are the implications? Do you tend to see a slowdown in the aftermarket? How does that typically behave in that part of the cycle? And what are the implications in terms of your margins, your business financially?

Yes. This is an important question. the OEs that we support, especially in mobile solutions, tend to be -- have a much more volatile production cycles on up cycles tends to go up maybe 10 or 20 or even 30 in discrete periods. So to the extent that we're at a recovery like that, what we tend to see is a bit more gross margin pressure that gets leveraged on SG&A. So earnings, cash earnings growth, but we might have a margin pressure there.

I think what's important to note is, in the last several years, we've changed our posture on pricing with -- so we used to in the 20 teens, being more of a price down type of cycle. We haven't had a real -- I'm going to put the post-COVID recovery side. That was nuanced. So the last time we had more of this type of normal economic recovery pre-COVID we would have seen more deleveraging as a result of that OE growth with pricing, productivity, I think we're in a better position today as a result of that.

No, that's very helpful. And I think we'll touch on it a little bit more, I guess, down the line. So I do want to ask a little bit more on pricing, but just -- in terms of the -- maybe diving deeper into the power generation side, taking it by kind of segments, I guess, that's obviously, to your point, an area of tremendous investment, a lot of -- a big topic of conversation. Can you just unpack where do you actually sit in terms of the value chain, how filtration intensity changes the size and complexity of these systems. And just as this increases and ultimately, how has that changed the economics for your company?

Sure. Our power generation is about mid-single digits, I think, roughly 5% of total revenue. And I think the breakout that's important is about half aftermarket, half new equipment. So to your question on the new equipment side, where we sit on the value chain or how we work with our customers is for large turbine systems, think basin peak power to a grid as an example there. we're the filtration system that works with turbine manufacturer, that's our customer. And we're filtering the ambient air going into that turbine where we tend to succeed and where we compete very effectively is higher technology needs in applications that are just, frankly, more difficult from an operating environment.

So think coastal areas, desert, high heat, some sort of difficult environmental challenge requires a more complex solution to manage the air going into that turbine. We also sell into what we would call the small turbine systems, but think about this as more -- they've typically been used in oil and gas. Of course, there's some more localized power with things like data centers now. And then again, the replacement parts, which is very sticky in this business as we work with the OEs on that turbine install.

And maybe just as we think about that installed base opportunity that will come with turbines, I guess, as all this equipment ultimately gets installed, how should we think about the potential for kind of replacement revenue and a percentage of first fake should we still be thinking about it as 50-50 or that aftermarket? How much does that ultimately continue to expand, especially if more of this is kind of behind the meter and perhaps running more regularly?

Yes. The replacement cycle for these is maybe 2 to 4 years, so they're a longer replacement cycle than some of the other products we have. But you're absolutely right that there would come behind these installs, this wave of replacement. The balance it will really depend on the time that 50-50, if you think about a new turbine installation, that can be well into 7 figures. So the filter content on that, of course, is much lower. These are really expensive systems. So to the extent that, that new install growth starts to moderate a bit from where we've been, then you would see that percent of aftermarket tick up.

Got it. Okay. And then just in terms of Donald and eventually, I guess, as you think about the projection, the demand here, how are you positioned in terms of demand -- or sorry, capacity in terms of being able to meet that opportunity both now and over time? Like is there any need for incremental investments? If you could just touch on that.

Sure. We've made some -- no, just to be talking Power Gen , we've made some investments in Power Gen. Think about it as throughput and managing the base today. But it is a place where we would be approaching capacity constraints. The order books are full for this year and then into next. I think the question for us is to what extent do we chase or just manage the capacity we have with again, throughput types of investments. This is a market that has quite a long history with Donaldson, we've been in it for decades, and it tends to be a boom and bust type of market.

So I would say that I'm also a bit tentative on just chasing today's demand with new footprints. We would want to manage the capacity within the 4 walls to the extent we can and then grow responsibly from there.

Got it. And I do want to remind the audience, if anyone has any questions, we have mics in the back, so feel free to just raise your hand, and we'll get a mic to you. But if there's none right now, I'll continue down that line. I wanted to just also ask about like you've had the -- so if you think about the move into Mexico in terms of the production and the broader footprint, we're running kind of at the same time. Just what has been harder about the transition? Any surprises in terms of -- versus what you originally expected? And what can -- what have you kind of learned from that process?

Sure. The move that Angel is referring to is the last few quarters, we've talked about standing up production for certain large turbine systems in a facility that we already had in Mexico. Our center of gravity for these large systems in production is Abu Dhabi, and we moved that over at the specific requirement of a customer needing source of supply in North America. It's turbines we've made before, customers we worked with before, so nothing new in that regard, but a new capability for this facility. And frankly, it just hadn't gone to plan. It is a different type of labor than we've typically employed in that plant. So there's a level of scale on certain applications that we didn't already have there.

We have skilled labor there, but they're doing different things. And then on top of it, turnover and the competitiveness of this environment have effectively just challenged the cost side of it. Turbines are going out. We're working with the customer and meeting that demand, but it's much tougher on the cost side. We expect to be through that over the course of the next couple of quarters, so midway through this fiscal year. At that point, will repurpose that capacity and effectively sell that out more to the midsized turbines that, again, are also growing really nicely and then refocus in Abu Dhabi.

Got it. Okay. That's very helpful. And as we think about getting to the kind of middle of mid-fiscal year and just your margins normalizing after some of these challenges, I guess, ultimately, what's the right way to think about the opportunity for the business from a margin standpoint once we kind of get beyond that?

Yes, the industrial margins, we would expect a spring back to the high-teens pretax profit margin, where we were a year and change ago. And then building on that with some savings from cost optimization projects we did. We've closed 4 facilities over the last couple of years with 2 big ones even in the last 2 quarters. And so now we're at the point of leveraging the start-up -- or excuse me, leveraging the new capacity in the new home, getting through startup. And we expect that to be annualized savings of about $10 million once we get to run rate.

Got it. And then maybe just outside of data centers, you've talked about improvements in quote and order activity, just in dust collection and other project-oriented industrial businesses. Just would you characterize that as kind of industrial CapEx recovery rather than just kind of improvement from a soft in terms of how you look at the cycle and just underlying demand that customers are telling you?

Yes, I'd love to be able to confidently say it's CapEx recovery. I think maybe it remains to be seen on that. our teams are out quoting. We have no indication that we're losing the tenders. It's more about the conversion to the PO that's been the harder part for us in this business. And these are projects specifically, not recurring revenue. And I think the thing that seems to be hanging over it is almost economic uncertainty. It's kind of this cloud of where to invest. We saw it really kick in a bit in the early part of last calendar year.

Tariffs slowed some global expansion plans. People were uncertain to where to go. There's been the steady stream of things that keep people cautious, and I think that's what's coming into our business. But again, over the last couple of quarters, quoting activity has increased, and we're feeling optimistic about the trajectory. Just needs to play out a bit more. And as you think about the -- what you're waiting or waiting to hear or see is it specific verticals? Is it specific quoting or turning to actual orders? Like what are the kind of the checkpoints that you're watching ultimately?

It's really that conversion to order quoting activity, of course, needs to remain strong. So that's the leading indicator on this. But we watch orders and backlog in this business pretty closely. And that's where, again, we have confidence that as we're heading into this year, we're contemplating some recovery in that. but it needs to play out.

Yes. And I guess, I know you're at the tail end in terms of reporting and you're a little bit different fiscal year, but the extent that you've seen the evolution continue over the last month, I guess, anything to note there in terms of that quoting activity versus what you were kind of seeing at the time that you reported your fourth quarter?

Not much. We reported just a few weeks ago. So no big change there. I mean our view is, though, this conversion, to your question, I think that's the stat we're watching pretty closely.

Understood. Again, if anyone has any questions, raise your hand. But if not, I wanted to move to aerospace and defense. So I guess one of the strategic ideas behind facet was just the downstate have customer relationships. Technologies that the other one doesn't necessarily have. So where are you in terms of seeing some of those tangible opportunities to bring those to the portfolio together and integrate and take advantage of that?

Yes. Facet was a really exciting opportunity for us. It was the company's largest acquisition. The business itself is about $110 million in turnover at the time of close with about 80% of that going to aerospace and defense markets. The opportunities that we see are about where in their prior ownership structure, they had limited ability to compete with other portfolio companies. So we're evaluating synergies across those. Now of course, the curtains are open and they can compete across any of these markets, especially in the industrial spaces. And then the other place is looking for synergies within Donaldson in places like our industrial hydraulics businesses. And sharing references and quotes.

I think it's too soon to say on this, but it is a place where we didn't model revenue synergies in the deal. It was unclear at the -- through the diligence process, we need to be getting a little bit more to understand and I think to your point, it's a very complementary business. Facet sells to places like airports for the fuel storage and we sell to the OEs for cabin air systems or something. So we needed to understand that a bit more, but I would say there's optimism inside the company. Something we got to report on as we understand more. We've had it for about a quarter and change, but feeling good about it.

Absolutely no. And I think as part of that, can you just help us remind us in terms of the accretiveness of the deal, without -- including revenue synergies, it was expected to be accretive, I think, by year 2. But just remind us of the progression of what's kind of baked into your expectations? And then it sounds like there may be potential upside there from revenue.

Yes, I think -- I'm glad you asked that. Thank you, because I think we have a clarification opportunity on this. So the deal on an EBITDA basis about double the company average. And in that regard, accretive immediately. We closed on the fourth of May. On a cash basis, so the business profit from facet, less interest expense associated cash basis accretive this fiscal year, fiscal '27 and then full accretion with amortization in year 2. The path on this, I think, is about continued growth driving. This is part of how we get there. And I think and maybe we come to it. But the balance also of share repurchase relative to paying down debt.

We're going to repurchase about 1% of shares this year, which is bit lower relative to our historic average with the goal of not necessarily a target leverage ratio, but more about get faster to accretion, total all-in accretion as quickly as possible.

Got it. I think that makes a lot of sense. And just in terms of -- I will go back to capital allocation because I think that's another area that I want to touch on. But just -- maybe last one, just if we think about the business over a much longer period of time, a lot of the equipment you serve is becoming more sophisticated, contamination seems to be -- keep getting tighter. Just across areas like turbines, aerospace, semiconductors and advanced industrial processes. I mean are you seeing a structural increase in the amount of complexity that flotation requires per asset? How meaningful could that be in terms of -- is there a step change in the growth algorithm for Donaldson over time or the industry overall consolidation? Just how talk what you think about that setup in terms of the structural?

Yes. This is a really important part of our strategic view is we've over decades, chosen places where technology is valued. So that means we aren't under the hood in a passenger car. We focused on more heavy duty. The opportunities as things get tighter, as things get better performing, fuel economy standards, 15 years ago as a change with over-the-road truck that gave us a new leg of growth and technology for those engines because the engines couldn't absorb as much particulate as they could before. So filtration plays really well in the environment that you're describing, more tech, tighter tolerances.

In terms of a step change to the growth algorithm, I think we'll see pockets in certain places. I don't know if it will average out. I think mid-single digits is kind of a stable place for us over a cycle. But the opportunities in places like disk drive right now. Obviously, the growth data centers is driving that up. But part of what's giving new life to movable driver is increased level of technology that has a significantly more complicated set of filters on it than the legacy technology. Those are the places where we see continued surging of market-specific opportunities. So this is where filtration is a really exciting spot overall.

And what does that do in terms of margin mix? And given that you provide more and more value to the customer in that operation, I guess, does the business have more pricing power in that vertical -- in those verticals? And as you see faster growth there to that allow for more of a margin mix up? How should we think about that?

Yes. Margin mix is part of the story as we go ahead. So we've talked openly about operating margins pushing much higher from where we are today. This year, we've guided a midpoint around 70%, I think, 16.9% exactly. The opportunity as we look ahead is growth from gross margin with mix being part of that, higher margin markets plus pricing on top of it.

Maybe that's a good transition to what you mentioned earlier in terms of a shift in the pricing strategy, right, particularly in the legacy business or with some of those OEMs or kind of that first fit -- can you walk us through that transition, when did it start to take place? When should we start to see it flow into the business? And what are the implications in terms of your go-to-market strategy to really kind of pivot away from price declines to trying to be -- making sure you're getting the value.

Yes. The very early innings of that were in the early 2020, so I think '23 -- '22, '23. And where we saw that was largely with the OEs in our Mobile Solutions business. And we want to have fair relationships with our customers. What we're finding is that with the old price-down model, it was getting tougher and tougher to offset that with cost. We could do that in the early 2000s, but lean, low-cost manufacturing, all of that has sort of played out. So it was much more difficult to offset that pressure. So in the early part of the 2020s a real push on pricing with the OEs. And this was kind of a, I'd call it, a less granular or less sophisticated approach of looking at the portfolios, the accounts and really here's what we need to reflect our value better.

And then the next step for us that we're early innings on is more about the granularity of it and really getting into the details. So we think there's another leg up in terms of pricing capability, but it's about understanding the details versus just the chunks of the accounts. And this is a place where 10 years ago, our pricing algorithm for the company looked way different than it did today. And we report it in our disclosures, and you can see price has been a positive contributor. I do want to say is just sort of an astric on that. Organic growth is a priority growth through pricing is not but we will manage pricing to ensure gross margin expansion.

Maybe to that point because you are making ultimately a decision when you're making sure to be more disciplined on price that you might make some trade-offs in certain cases, right, in terms of volume. How should we think about -- or what are you seeing in terms of the competitive response or discipline to equally have again, more of a pricing structure versus others trying to undercut in any way?

Yes, I think the -- we're fortunate that we compete in fairly rational markets. So the competitive response isn't much different than it has been previously. I think the opportunity for us is this refinement that I mentioned, but -- our competitors are well known to us. They're very consistent with who we've competed with a long time even with some consolidation or 1 of them going public. It's not a different environment than we're used to. So I think we understand that well. And we know that in certain places, it's about locally competitive and we compete on availability. That's really true of our aftermarket parts. We can get priced because we can also say, we'll have it to you tomorrow. So there's different dimensions versus just raise the price.

Again, it's important for us and especially with OEs that we have a fair relationship because we like being on those new platforms of tractors and excavators and transfer over-the-road trucks. We want to be on those because we sell more aftermarket and we get on those 2. It needs to be 2 ways, though.

And should we think about this as a little bit of a structural shift in terms of the pricing strategy and how you go every single year? Or is this a catch-up in terms of some of the costs, given how inflation has been so challenging. How would you kind of characterize across.

Yes, I would say that the big chunky work that we did a few years ago was a catch-up. And you saw a step change over the course of 4 to 6 quarters in our Mobile Solutions business, several points of margin improvement. The next is going to be more iterative. I will say, though, that we've got new muscle new discipline around the idea that if something changes in the market, we're agile. So we'll price for that accordingly. If there's a change in cost as a function of the Middle East conflict, we'll react to that. We won't just say price increase in January and wait. We want to be real time on it, too.

Got it. Yes, I was going to ask is -- are these more kind of annual or are they multiyear? Like how often do you get a chance to kind of reset versus maybe a surcharge related to Middle East or something?

Yes, much more annual. That's kind of the rhythm to it.

Got it. All right. And then maybe just one to kind of bridge the gap between price cost and market share, which I want to touch on. Just to what extent has the shift or the focus on kind of domestic for domestic? Has that had any implications on your ability to either compete cost-wise, or vice versa take share in any particular bucket?

Yes. This is a really important part of our footprint that I think we were able to market, I guess, to some extent, 1 year ago. So about 75% of what Donaldson makes in the world stays in that part of the world. For the most part, it's about supporting our customers and this availability and access that I mentioned before. So if we make something in China, it was about keeping it in that region or make something in the Americas that's keeping it in that region. In the time of tariffs, that created quite a bit of insulation. Tariffs were immaterial to the total company much less than 1% of total revenue, and we're able to navigate this.

And I think to your question then, our ability to supply our customers reliably. And there was definitely a tariff impact, but more on a muted basis. I think that helps us. Now for certain of our competitors, I don't know if that -- I don't think that gave us a material advantage. But what it did allow us to do is to maintain the reputation and the relationships that we've had without having a disadvantage in the situation.

And maybe how would you just frame the market share opportunity broadly in terms of across first aftermarket, the different verticals of your products, I guess, is there pockets or opportunity versus less. And just like what is what's the we need to do to get that.

Sure. I think there's the classic it depends the answer on this. But let's start this way. If you think about the maturity of our operating segments, the mobile solutions has much more specific opportunities, whereas you move through industrial and life sciences and greater opportunities as a function of their relative maturity. In Mobile Solutions, I think for us, it's about continued expansion with new technologies that help really grow their part business. So they look for proprietary parts. They look for meeting some sort of performance backs. And again, we compete in heavy-duty markets. We're not in the light duty. So they're looking for to Angel's question earlier, better performing engines that require better filtration less of a market share gain and more about maintaining and incremental growth.

In industrial, it's about expansion and thinking about it as content under the roof of a factory. And one of the things that we did a few years ago was reorganized the industrial group to have a head of aftermarket and services. This is a place where we recognized we were underpenetrated and each of the business units was doing their own focus on aftermarket. Well, recurring revenue growth is an important part of the strategy. And so we've reorganized around that. There's a lot of share opportunity there because of the fragmentation in this space. And then life sciences, where we're less mature places like again, food and beverage, disk drive very mature, high market share, but the rest of it, a lot of market share opportunities.

Understood. And maybe just switching over to capital allocation. I think still ample kind of flexibility or firepower in your balance sheet. So is it more that you want to integrate this and then go look for more opportunities? How should we think about the timing or the appetite as well?

Sure. We are definitely interested in doing more. And of course, the timing is hard to predict on these types of deals, but a facet like deal in terms of the company characteristics are things that we would absolutely consider. So higher growth and very good durable markets where the customer is sticky, margins that reflect that, low capital intensity. And again, this is aerospace -- last several years, we've bought 4 smaller bio companies. These still need to mature. So the place where we're probably more out of the market is on any sort of new tech that's a pre rev bio company, we're thinking more commercial access established organization at this point.

Understood. And then maybe from a leverage standpoint, I guess, how would you kind of frame your longer-term target, but also just your willingness to lever up for potential acquisition?

Yes. Definitely, I willingness to lever up provided it's do more, and we would do more like that. I would be very cautious on something that was a transformational deal. It's never say never, but it would have to absolutely be a strategic bullet markets we understand markets that we want to pursue.

Understood. No, I think that makes a lot of sense, and that's good. Capital spin is always a good thing. Maybe just last 1 with the last 2 minutes here, just you wanted to make sure, I guess, don't want you to, I guess, to your own thunder from Investee, but as you think about having an Investor Day potentially in the future, I guess, what are the aspects that you think ultimately you want to try to communicate in terms of broader topics or anything like that? Again, no need to go into details, but just curious like are there specific aspects that you think is important that people understand about the business that you feel like you need to unpack a little bit better as you have your investor conversations.

Yes. I think the topics that you raised today are good setups for that. So it's, first, what is that growth algorithm. And which markets are the ones we're pursuing a as I mentioned before, portfolio management is a really critical part of the work we're doing right now. So answering that question of what does it mean and how should all of you think about it? And then where does that leave us in terms of margin expansion, not just that margins get better, but what's the algorithm on that as well. and examples of the types of work we're doing to push that up. And then I think it's also, as we think about the next even 5 or 10 years, how do we and pushing that and again, helping all of you understand what it means and how to think about that in terms of modeling our opportunities.

Absolutely. We're looking forward to it. And if there's no other questions, I think that brings us to the time. So I wanted to make sure, again, thank you again for the time and looking forward to again investor day.

Thank you. Good questions as always. Really appreciate it. Thank you.

Thank you.

So good morning for the first day of the Jefferies Industrials Conference. It's Laurence Alexander with the Jefferies Chemicals team. It's my pleasure to introduce Rich Lewis, the CEO of Donaldson. And without any further ado, Rich, I'd like to pass it over to you.

All right. Thank you. Good morning, everybody. Welcome to the Donaldson presentation. As Laurence said, my name is Rich Lewis, President and CEO of Donaldson Company. Looking forward to sharing our story with you today.

So we'll start with the safe harbor statement. I know everybody has seen this a million times. We released our fourth quarter fiscal year '26 and full year results 2 weeks ago to this day. So everything will be anchored back to the guidance and the results we presented at that time.

I'll spend a little bit of time on this slide because I think this is the slide that gives you a little bit more intimate picture of who we are as a company. We are a filtration company, and we are a technology-led filtration company. So what does that mean? I'll anchor on the words technology and filtration and take you down a little bit into some more detail.

So when we talk about filtration, filtration touches really every corner of our economy, every corner of our daily lives. It's pretty much present in all the business verticals in the industrial spaces. And it's a really wide-playing field. The second part is technology. We play where technology matters. We've invested and built a capability around technology over 100 years.

And so we're looking for applications, products, positions in the market where incremental investment in filtration technology provides more benefit to our customers. And so those are the 2 areas that we really play in. And so if you think about our customers, we're on mission-critical applications where technology matters, and we really do 2 things for our customers.

We provide them greater peace of mind protecting their most critical assets. So think about their people, their products, and their processes, how they make money. We protect those things with our filtration solutions. We enable them to have greater levels of prosperity because when they use a Donaldson product, they can make more money than they can with the alternatives. And that's through overall lower cost of ownership through higher levels of yield, better uptime, better reliability.

So it's really a wide market opportunity, and we focus on mission-critical where technology matters applications. Over the century-plus that we've been in business, we've built a set of capabilities foundationally that we leverage across these markets. So think about the technology base that we have is really unique, and we can deploy it into multiple endpoints in the market. We also have a similar operational capability that we can deploy into all these different market segments.

That gives us a reinvestment advantage to invest back into the company, continuing to set the bar for technology across all these market segments. And we've done that decade over decade over product life cycles for many, many years. That allows us to reinvest back into the company. And if you think about our growth strategy as a company, it's really one of balance.

First, we have a set of applications, product lines, markets that we participate in, and we reinvest into those to continue to maintain a leadership position. These are markets that foundationally are growing, and then you add in pricing and market share gains for our growth algorithm. We use the proceeds from that to broaden our technology base. So think about higher purity, lower -- smaller contaminants, and this allows us to open up new addressable markets, markets that are in higher growth and higher margins. Continuing to grow our core while we expand our base to open up a wider swath of opportunities for Donaldson. This is really who we are, and this is how we've been successful in the company and why I think we're a great long-term investment opportunity.

This is a good takeaway slide, 111-year-old company. We operate across 3 verticals, each with margin expansion opportunities and growth opportunities for many years to come. If you go back to technology, we have over 3,000 active patents. And a big part of our story is the resiliency and the reliability of our recurring revenue. Over 2/3 of our revenue comes from consistent, recurring, high-margin replacement parts. We deploy this across a global network, many different product lines, many different applications, and we operate globally as a company.

This allows us the scale to drive efficiency, but also a local capability and a local touch. We built sales, engineering, and operational capabilities to really support our customers where they need us, which is in region and on different types of product applications. 75% of our sales are built in region, which gives us a robustness and reliability against some of the global economic challenges that we face every day, and it really makes us a good, trustworthy partner for our customers.

Our goal financially is very simple: deliver higher levels of profitability on higher levels of sales. Fiscal year '26, which just ended at the end of July, we had set records for sales, operating profit margin, and EPS. Now if we look to fiscal year '27, at the midpoint, we're looking at a 7.5% top-line growth. We'll set a new record on operating profit margin at 16.9%, so a 90-basis-point expansion, and then we'll set growth for EPS at 8%.

And we're doing this through higher levels of replacement parts, pricing excellence, and then really driving expense leverage and operational excellence through every layer of our company. This is a big part of who we are as a company and a big part of our success. So we're really excited about fiscal year '27. We see a lot of opportunities ahead. And I'll talk about some of the verticals here in a second.

I want to spend a little bit of time on our competitive advantages. I think this is a tough one for people to digest. And so I want to take a little bit of time because it actually is layers of advantages. It's not one individual thing, and it changes over time as we compete in markets. Generally speaking, we engage with our customers when they have a filtration problem that they need to have solved. So we're solving their toughest filtration problems.

And a lot of times, that happens at the very outset of a market that's being developed for the first time or at an inflection point where something is changing with our customers' technology that requires them to have a better filtration solution than that's been available to them in the past. We do that. We solve their problem. That starts to seed a foundation of trust that we build on.

And we build on that by working back and forth with that customer many times over decades to develop a deep application expertise. So if you think about an air filter in the mobile solutions market, it's not 1 product. It's dozens and dozens of applications that require very unique engineering capabilities. And then if you look across all of our end markets, they require very unique operational capabilities.

The foundation is consistent, but there's bespoke capabilities required to serve each one of those markets at a leading level of service. We develop those 2 capabilities over decades of working with our customers, then reinvest to create other advantages through cost and efficiency based on that scale that we have built. And then we protect that with a relentless focus on continuous improvement. So it's really a technology application, operational capability that all comes together to make our markets very defendable.

Three segments. We talked a lot about the markets at our last earnings call. I'm sure there'll be some questions on this. So Mobile Solutions business is performing quite well. They've expanded profit margins. They've continued to grow that business in spite of some of the end markets being in sort of downturns over the last 2 or 3 years. We are seeing more green shoots across this space as we look into F '27.

We're really optimistic about the growth opportunities in this business. The interesting part is they've continued to grow through a market downturn, and the business has done quite well, both in share gain and executing the strategy. Industrial Solutions, aerospace and defense, power gen, very strong secular tailwinds in that space. We're starting to see opportunities on the non-power gen CapEx side. We're seeing some additional quote activity. So a lot of opportunities in the industrial space, and we're expecting a big step-up on an execution in fiscal year '27.

And then Life Sciences is anchored by our Process Filtration and Disk Drive businesses who have been doing quite excellently while we build out our technology base for high-purity filtration. So 3 segments all have really excellent growth opportunities and margin expansion opportunities. Capital allocation remains the same, a very balanced, disciplined approach to capital allocation.

Our first priority, our second priority is to invest back in organically. We have a great business strategy, a great business model. We want to grow organically in our core businesses while we build out our technology foundation. We will continue to do strategic M&A. I'll talk about Facet here in a second. That was our largest acquisition in the company history. We just closed that on May 4.

And then we'll continue to disperse monies back to our investors through dividends and share repurchases. We've been a proud member of the Dividend Aristocrat Fund for 10 years. It takes 20 years of increasing dividends to get into that fund. So we've got 30 years in a row of increasing dividends. It's a big part of our strategy. So we're going to continue to be great cash generators and invest back into the business.

A little bit on Facet. So Facet was our largest acquisition. We closed on May 4. We've talked a lot about this acquisition. It's an industrial business, but it has, I would say, life science attributes, very high margins, very sticky customer relationships, all based on high critical applications in the aerospace and defense industries and with expanding opportunities into power generation.

Really good business, high margins, about 2x our company average and 70% replaceable consumable parts, really fits our strategy quite well. And thus far, it's performing exactly to the business case that we had put out there for this one. So we're happy with the team. They're very Donaldson-like in their culture, very customer-centric, and they have a great product in the market.

So I'll wrap up here. We're a filtration company. We lead with technology. It's a very wide market. We have a lot of critical applications where we have opportunities. We will continue to grow the company organically. That's part of -- a big part of our balanced growth strategy while we build out our technology base. And I think we're going to have a great F '27, and the outlook for the company is quite bright for years to come.

With that, I'll turn it over to Laurence.

So please put up your hand if you have any questions. But maybe just to start off, can you unpack the growth algorithm for 2027? How much of that is share gains? And how much of that you're thinking about is price/mix? And really on the price/mix, just to kind of put the lead out there is, are you seeing that you're being -- like there's a mix in your end markets that might reverse towards the end of the decade? Or do you see the price/mix dynamics as kind of sticky and stable to the margin expansion?

Sure. Yes. So let's think about the 7.5%. We'll go to the midpoint. You can pick whatever endpoint you want. So 2% price, 2% year-over-year Facet sales since we only closed them on May 4, 1% FX, and then the rest would be market share gains. So that's the algorithm for fiscal year '27. Of course, as our OE markets come back on the first-fit side, we'll see a little bit of gross margin pressure. But I would assume that the margins that you've seen will continue through the end of the decade through other business initiatives.

And then with the share gains, some companies in the industrials have been talking about as their end markets accelerate, they see the rate of share gains also accelerating. So there's a bit of an amplification effect. Do you expect that to happen in this market -- in your markets?

I think if you look across all of our markets, and you probably have to go market by market to really answer that question. There are some that we're seeing accelerating share gains. I would say others are pretty static with what we've traditionally seen. Share gains is a big part of our growth strategy, and it varies business to business. You can think about it in the 1% to 2% range overall.

So a good example would be our Mobile Solutions business. These are sales cycles that are 3 to 4 years long. And then there's another 3 or 4 years before the service part revenue really starts to accelerate. And we can measure our share gains today and look at project revenue sometimes 6 to 10 years out. And so we know exactly how much share we're taking today that will manifest in years to come. So we're able to measure that pretty accurately in a market like that. Other markets, it's a little bit tougher. But...

Now you've commented about how the businesses need to kind of earn their place in Donaldson.

Correct.

Can you talk a little bit about what criteria you're using? And particularly, when you identify a part of the business that needs to be upgraded, how much time or what resources they're given to upgrade? Is it the whip or the carrot or a combination?

Well, the criteria we're looking at is how attractive is the niche we're in from a growth? How durable is the growth? What position are we in? Can we be in a leadership position in that particular niche? What's the ultimate financial performance of that industry as a whole and where can we play into that? So most of our businesses, we're looking for durable, scalable growth with a path to operating profits that are in excess of what we are generating today.

Those are the ones that are really being goosed and funded. If they're on the side of they're below that, there's a process we put in place to sort of manage that portfolio, and the time frame varies. So if it's a long-term investment and we're really seeding a long-term market, we'll give it more time. If it's an execution problem, then the expectation is 1 or 2 years, it's fixed.

There's a good example where we had a business years ago that was underperforming profitability-wise. And it sort of was a little bit of a challenge. We reshaped that business, turned it into actually one of the leaders in our portfolio, and it took about 5 years on that one to get that exactly where we wanted it. So it varies business by business, but there are very specific criteria that we're looking for. Number one, are we the best owner? Do we have a right to win? And then can we get it to the levels that we expect the company to be at.

And then I have a question, which is more about how you manage complexity in the business, but really around growth opportunities. There's kind of a proliferation of strong secular trends in the industrial markets. And each year, there seems to be like a new one, like data centers now is sort of the flavor, but there's several others coming down the pike that seem to be emerging. How do you allocate resources across those? And are there any secular trends that you think will really change Donaldson's growth algorithm over, say, 5, 10 years? And which ones are you just not playing in and you have no interest in?

Yes. So if you think about -- we talked about this wide filtration market, 2 markets that we typically don't focus on are markets that touch consumers. So think about automotive and home HVAC, where a consumer is ultimately making the last replacement filter decision. Those are not markets that we traditionally focus on. We are usually B2B where the applications are mission-critical, and we can help them make more money. And if the overall cost of the filtration system is relatively small to their operating budgets and the profits they generate from those.

Secular trends, of course, we see a lot of opportunities in the aerospace and the data center side of things. How long the data center will go is anybody's guess, but it's not months, it's years. But that's one that we're well positioned for across multiple product lines. So we're in a good spot on that one. I think if you look at other secular trends that are out there, it's sort of the ones we've always been dealing with. Sort of more income is driving higher levels of consumption of certain types of food products, which has really been helping our food and beverage market.

Data storage is driving our Disk Drive business as people put things in the cloud, AI is driving that. So there's a lot of opportunities. But I would say our core business, the foundation of that is still going to continue to grow, and that will be a big part of our focus because we want to protect those #1 and #2 positions, and those businesses have a lot of opportunity in front of them.

And when you think about I'm going to ask a broad question with 3 pieces to it. And this is around automation. One is, I think your process know-how is often given short shrift. So if you can talk a little bit about kind of your differentiated manufacturing process and how that's changing kind of with the ability to scale up and automate different steps.

And then also as you think about the end market implications, I've always been curious about just how much human error contributes to kind of people needing to replace the filters. I mean like is it better for you if you have a mining vehicle that is automated versus a human operator? Like is automation a net benefit? Or is it going to turn into a bit of a smaller end market because there's fewer mistakes being made?

Yes. I think if you think about -- let's just take automation for us because I think it's an important part of our story. A lot of people think about the filter and the technology that we give to our customers and 3,000 patents and all of the IP around that, that's an important part of the story. But equally important is the advanced manufacturing group that supports that. A lot of our manufacturing processes are also trade secret, IP protected because they're very unique filters that we're deploying.

And so the automation in a lot of our manufacturing lines has increased significantly over the years because the products have become more complex, more challenging to make. We have a factory in Indiana. It's a very advanced line. I think it has 30 -- 25, 30 robots on it. So it's an extensive acceleration of a 10- or 15-year ago line that might have 1 or 2 robots. So a lot of opportunities to continue to drive complexity, and that's where the scale gets hard to replicate for people because we're setting those standards.

Automation as a trend in our markets and the impact on us, I think, is relatively small, whether there's an operator in the vehicle or not. We don't play a lot in the cabin filtration space, which obviously, you would need less cabin filtration if there's no operator. We're protecting the power unit. And as long as those power units continue to be what they've traditionally been, and we expect that to be that way for quite some time into the future, they'll need the same level of filtration.

If anything, connecting the vehicles and putting more sensors on them makes for the change-outs to be more reliable. So that part of it has been very successful. We see a higher level of retention rate and a higher level of on-time changes when there's monitoring involved on the application.

I was just wondering what your exposure is to, I think, this HAMR product at Seagate. Is that gross margin accretive or dilutive? And then in general, it seems to me that you have a lot of end markets that have, at least on the OE side, have kind of troughed and it should be heading upward. And so when you gave guidance for this next fiscal year, what were your underlying assumptions? And maybe you could just walk us through your end market -- the big end markets you have and where you think you are in those cycles?

Sure. Yes, let's take the HAMR example. So HAMR is a new technology released into the Disk Drive market. It's really an important step for that market because they need to continue to stay ahead of alternative technology solid state. And with the density of these new drives, it requires a new manufacturing process for our customers. And the level of intensity in the filtration is significantly higher than the prior generation, which was significantly higher than the prior generation.

So you're talking about the cost per drive in filtration has gone up significantly. Margin accretive for sure. Just generally, that's a higher-margin business for us, and we're very well positioned for that technology shift. I was -- just a quick side story. I was at our Disk Drive facility in Thailand a couple of years ago with one of our Disk Drive customers trying to get that HAMR technology up off the ground. And it was a pretty cool experience to watch our people working with their people. That's when I really understood the depth of our technology capability in that business.

We were actually solving problems that had nothing to do with our product, but was helping them solve problems with their drive, and that's that stickiness we get from a technology-based company. On the OE side, yes, ag has troughed. I think if you go back a couple of quarters ago, we were starting to see green shoots in ag, but it was very selective where it was at. Certain size vehicles, certain customers.

You fast forward to today, and we just talked about this a couple of weeks ago, it is more broad, the green shoots, but not to the magnitude that we've seen other markets step up. So we think we're in the early innings of that because these markets, when they come back, they come back usually 20%, 30% in volume. And so we're starting to see ag come back more broadly, but still not to those higher levels yet. So we'll see how the year goes on, but it certainly feels like it's starting to turn in ag.

Mining has been pretty solid for the last 2 or 3 years. Construction has strengthened. We're seeing a lot of strength across our construction products. And then I'd say on-road trucking, it's primarily been a U.S. story where we're starting to see that market really start to inflect through the end of this calendar year and then probably into the first half of next year. And then we'll kind of see what happens with the regulations and where the market is at.

But yes, they've all sort of inflected and they're all in positive territory. And I think if you go across our entire company, it's very rare to see all of our markets sort of moving in one direction. And I think other than maybe one, they're all moving in a positive direction. Part of the guide was if you think about the split of first-fit versus replacement parts in that OE business, that mobile business, we're very, very heavily weighted towards the service parts side, and that business has been going very strong for now over a couple of years. So the first-fit is going to inflect, but it's still a relatively small part of that business.

Yes, yes. So just touching on what you said in terms of like U.S. trucking and those orders in general. Can we just -- can you just walk through a little bit about what you're seeing in terms of like the Class 8 trucking orders, like kind of at what point that sort of inflects, how much like revenue and just like generally, how that can contribute to you guys on a top-line basis?

And then do you see that kind of contributing to aftermarket in like years to come going forward? Or will that sort of just these new orders will just kind of replace older trucks on the road and that like number of trucks would be stagnant, if that makes sense. How do you kind of like see first fit and sort of just general [indiscernible] trucking orders contributing over time to the aftermarket?

Yes. So the market has inflected specifically in the U.S. We've seen significant uptick in build rates. Keep in mind, that's still a very small percentage of our overall company on the first-fit. It does drive long-term revenue because we are layering in new intellectual property, new technology to those customers. And over time, as those trucks get later in those years, it gets a little bit harder to protect that. So as they renew those cycles, our retention rate goes up.

So I think from an overall standpoint, continuing to turn over programs and continuing to see build rates improve will affect the long term. Probably more importantly, and we talked about this, I think, either 1 or 2 quarters ago, we had a nice market share gain on the aftermarket side. And a lot of that runs through both independent distributors and OE distributors.

And so when we win these products from competitors, not only do we get on the shelves for that particular end customer, but we're now on the shelves for all their customers they sell to. And so that gives us additional pull-through. So each incremental win there is a nice early revenue gain, but it also provides longer-term revenue opportunities because now we're on the shelf. And when those customers come in, they may not be on contract, they can buy Donaldson product. So really happy with the performance on the U.S. truck business and where it's headed.

Can you just give us a sense from a corporate planning perspective about the mining cycle? It's been strong for a while. Is it a long cycle? Are you planning for that? And would there be future acquisitions in that space?

So mining specifically, I would say it's not a target from an acquisition standpoint because we have pretty much a full product line portfolio. We have global reach. We have great dealer network. It's an area where we are really focused on organic growth and making sure we're touching those customers in unique ways from a product availability.

There's maybe one particular product line extension we could do in that space, but it would be small in nature. It wouldn't be -- the base business and the organic market is really what's going to drive that. And it has been pretty solid for a while. We're still not back to levels we saw in, let's, maybe, say, 2012. I mean that was really peaked out back then. But it's been pretty strong, and I would expect that's going to continue for quite some time.

If you look at all the key statistics that we see and our customers talk to us about, it certainly feels minus some sort of global economic shock that this thing has legs for quite some time. And it's a great market for us, that mining market. That's where technology matters probably more than anywhere in the mobile space.

A quick question. Just 30,000-foot I mean the move in general, moving to electric, I don't know. And is there filtration -- does that create some sort of existential risk to your company?

Yes. No to the existential risk. Obviously, if you go back 5 or 6 years ago, this was a fairly discussed point. I think we have a very extensive electrification model. It's quite elaborate and it manages a lot of inputs and helps us predict what's going to happen in that space, plus you have all sorts of external inputs as well at this point. Our position has never changed. I think the world sort of came to the same conclusion that we were at, which is this thing is way out there.

Just to give you kind of an anecdote, we did a deep strategy review with our Board in January. We had 2 large OE customers present electrification at that meeting. The message across 2 completely different markets was this thing is significantly further out in the future than we anticipated. And if anything, they have a bunch of investments they've made that they're not really getting leverage on to date.

So long term, we can't ignore it. I would say, if you think about the next 15 years, it's immaterial. And then after that, I think it will drive probably opportunity for about 15 years. The technology that wins in the end will dictate how much filtration. So if it goes more fuel cells, there's actually more content in filtration on a fuel cell than a diesel engine. If it goes battery, there's less.

We continue to diversify into high-purity filtration in our industrial business. So it will never be an existential question, it'll just be how important is that vertical versus the others. I would say for the next 10 years, think about mobile being very critical to the company. I do believe this market will consolidate eventually. There's a highly fragmented 50% of the market where I believe the competitors will really struggle to try to maintain because they're very exposed to automotive, which is going to electrify faster.

And without that base of business, I'm not sure how they're going to fund themselves. So we believe that we'll be a consolidator of choice in this space, and there'll be a lot of opportunities to sort of pull that together and get more scale over time. But long term, we continue to diversify into other places, strengthen the company in other ways. But you can think about that as a 15-, 20-year problem, not a 5-year to 10-year problem.

[indiscernible] semiconductor capacity going forward, do you guys benefit from that?

We do. Yes. So we have a microelectronics business that we just folded in with our food and bev that we call Process Filtration. And we are on all the lithography equipment inside these clean rooms. So the clean room has a filter, the lithography equipment has a better filter, and that's the 1 we provide. It's not a huge business. It's a niche. But inside those same fabs are lots of liquid opportunities.

And the technology we sell into food and bev and pharma actually is very similar to the technology they use on specialty chemicals and some of their liquids. So that's why we combine the 2 businesses. We have a great robust sales force in our food and bev. We have a great market reputation with the 1 product we have on lithography equipment. We want to combine those 2 and expand our product line to press into the liquid side and get even more exposure to the microelectronics.

That's a great space for us. So when we think high purity, everybody, a lot of times goes all the way to pharma, biopharma, but it's these advanced industrials, there's a large market share opportunity there as well in high-purity filtration, microelectronics and food and bev probably being at the top of the list.

And then just very quickly, can you touch on the strategy going forward for Life Sciences? And also, can you touch on kind of do you have the right assets to be competitive in fluid? Or do you still need to scale up there?

So on Life Sciences, I think, Laurence, if I don't answer your question correctly, let me get another shot at it. I think the way I understand your question is what does life science look like for us going forward. So the base in that business right now is Disk Drive and Process Filtration. And you would ask, well, what does Disk Drive have to do with life sciences as well? It's a high-purity filtration solution.

The solutions we deploy for HAMR is actually very, very small contaminants, sometimes even gases that have to be absorbed. And so that technology is part of the high-purity space that we're in. Our Food and Bev business that we've renamed Process Filtration probably 15% of that business is actually pharma. And so the same products are used in food and bev can be used in pharma. They're also part of our data center cooling product offering.

So it's a broader process filtration business. We see a lot of opportunity to grow that business. We've invested in 4 bioprocessing products. These are all early-stage sort of disruptive-type products. So time will tell how disruptive they're going to be. We've commercialized a lot of products across those 4 businesses and market receptivity will be judged over the next couple of years.

But the goal of getting customer access and then we'll continue to build out our technology foundation. Think about that as a long-term seeding effort to get access into that market. It's not a meaningful contributor for the next 2 or 3 years, the bioprocessing, but it's an attractive market over time that if we can find the right access point, we believe will be a meaningful part of the company further down the road. So we like that market. We think filtration matters in that space. Our ability to access it is what we're working on right now.

Very, very quickly...

You're going to earn like $3 this year and next -- you guided to like $3.30 or something. But it looked like less than 10% EPS growth. It seems so low. Like why...

Yes. I think if you deconstruct that, the acquisition of Facet and the debt financing and the amortization costs are what's putting pressure on that, Brad, if you strip that out, EPS would be.

Yes, the dilution from Facet this year is $0.12. So think about tacking $0.12 on to give you a sense of the organic growth. So now you're in that 9-ish percent range.

And we'll crank that debt down over the next couple of years. So yes, that's the immediate pressure from that acquisition we just closed on May 4.

[indiscernible] So the [ $100 million ] from that acquisition?

$100 million plus.

$100 million?

$120 million, give or take.

Hello, everyone. Thank you for joining us, and welcome to Donaldson Company Q4 2026 Earnings Webcast. [Operator Instructions]

I will now hand the conference over to Sarika Dhadwal, Senior Director, Investor Relations. Please go ahead.

Good morning. Thank you for joining Donaldson's Fourth 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 fourth quarter performance and our outlook for fiscal 2027.

During today's call, we will discuss non-GAAP or adjusted results. The fourth quarter 2026 non-GAAP results exclude pretax charges of $8.9 million, including $4.2 million of restructuring and other and $4.7 million of business development charges. This compares to prior year pretax charges of $9.5 million of restructuring and other. A reconciliation of GAAP to non-GAAP metrics is provided within the schedules attached to this morning's press release.

A quick note on the Facet acquisition. We acquired Facet on May 4, 2026. Therefore, beginning with fourth quarter results, we will report on our combined performance. for clarity and to help understand organic performance, Rich and Brad will add detail on facets impact in their remarks where appropriate. Please keep in mind that any forward-looking statements made during this call are subject to risks and uncertainties, which are described in our press release and SEC filings.

With that, I will now turn the call over to Rich.

Thanks, Sarika, and good morning, everyone. Fiscal 2026 was another record year for Donaldson Company, and I am proud of the way our global teams came together, demonstrating agility and resilience, and finishing strong. Led by our collective mission of advancing filtration for a cleaner world. We reached sales of $3.9 billion, an all-time high and a 5% increase versus 2025 and grew EPS 8% to a record $3.98, expanded operating margin to a record 16% and returned $250 million to shareholders through dividends and share repurchases. Our execution on our clear and balanced growth strategy is yielding higher levels of performance.

In mobile, we are building on our strong first-fit and aftermarket leadership positions, leveraging our large installed base, gaining share with our OEM partners and winning new customers. In Industrial, we are scaling our platform, increasing our aftermarket penetration and expanding in high-growth end markets such as power generation. In Life Sciences, we are applying our industry-leading technologies to grow and gain share in attractive markets focused on high-purity filtration. In support of our growth strategy, we completed the largest acquisition in company history, facet filtration, expanding our strategic position in durable end markets, including aerospace and defense, and power generation and also strengthening our financial profile with Facets high-growth high margins and high percentage of aftermarket sales.

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

Our best-in-class technology uniquely powerful because we focus on filtration capabilities and leverage these technologies across markets. Our ability to help customers meet evolving environmental and operational goals by helping to protect equipment processes and people and our clear and balanced growth strategy, as described earlier. This is how we have and continue to win.

Now I will review some fourth quarter highlights. Brad will discuss the quarterly financials and fiscal 2027 guidance in more detail, and then I will return for some closing remarks. In the fourth quarter, sales surpassed $1 billion for the first time in company history, growing 8% above prior year, driven by higher volume, including the facet acquisition and pricing benefits. Operating margin was 17.5%, up 110 basis points over prior year and 90 basis points sequential step-up from third quarter due to gross margin expansion, including from improved operational efficiency. Adjusted earnings per share were $1.15, 12% above 2025.

Now I'll cover some highlights by segment. In Mobile Solutions, sales were $635 million, up 8% driven by strong volume growth and pricing. Aftermarket sales were $512 million, up 9% with increases in all regions and in both channels. We grew double digits in our independent channel where we continue to gain share through our product availability, reliability and consistency. We are realizing sales from the major North America fleet win we mentioned last quarter, and we are excited about further strengthening our dealer relationships and creating meaningful pull-through opportunities for incremental sales. On the first-fit side, Off-Road sales were $95 million, flat to prior year with strength in construction offsetting muted performance in agriculture. On-Road sales of $29 million increased 9% as truck production began to ramp, particularly in the U.S. and Europe.

I am encouraged by the momentum we are beginning to see in our first-fit businesses in this quarter. We had several meaningful program wins across regions, positioning us well for years to come. Another bright spot within mobile has been our business in China. Sales were up 27% and due to a nearly 40% increase in OE replacement part sales. We are winning new platforms, particularly within the off-road and our growing export market is driving demand, and we are seeing our razor to sell razor blades model at work and driving aftermarket sales strength.

In Industrial Solutions, sales were $334 million, up 8%, driven by the inclusion of Facet sales, which added $30 million or 10 percentage points of growth. Aerospace and defense sales, which now include Facet, were $76 million, a 61% increase versus 2025. Organic aerospace and defense sales declined 3% and as overall supply chain constraints, while incrementally improving in some areas persist. IFS sales of $257 million declined 2% and lower dust collection, new equipment volumes compared against a strong quarter and prior year, were partially offset by robust power generation new equipment. New equipment sales from our industrial project-based businesses can be lumpy which is why growing aftermarket penetration remains a key to our strategy.

To that end, this quarter, IFS replacement part sales grew in the low single digits and accounted for 51% of total IFS sales. In Life Sciences, sales of $90 million increased 10%, largely a result of double-digit growth in disk drive, which has been supported by strong market conditions and increasing demand for newer technologies. Solid food and beverage sales also contributed to the increase. Part of our success in food and beverage has been driven by our ability to serve an expanding range of high-purity applications, including in food and beverage, health care, pharmaceuticals and data centers. Through our growth in these markets, we have seen increasingly commonality and the capabilities required to serve them. including the underlying filtration technologies, including membrane platforms, engineering, manufacturing and regulatory.

This same foundation extends to our microelectronics business. As such, beginning in the first quarter, we will operate our food and beverage and microelectronics businesses together under a new name, Process Filtration. With this focused structure, we aim to drive scalable above-market growth.

In summary, I am pleased with our fiscal 2026 results. I am particularly impressed by how the Donaldson team closed out the year. We've been in fiscal 2027 with robust order volumes, healthy backlogs and focused execution. Our full year guidance, which Brad will cover in more detail in a minute, reflects our plans to build an even stronger Donaldson for the future and continue our long history of shareholder value creation. To that end, for fiscal 2027, at the midpoint of our guidance ranges, we are forecasting record sales of over $4.1 billion, a 7.5% increase over prior year, driven by growth in several key high-margin businesses, operating margin expansion of 90 basis points to 16.9%. Earnings per share of roughly $4.30, including approximately $0.12 of dilution from facet and free cash flow conversion of approximately 95% to 105% which is important as we maintain our commitment to return value to our shareholders.

With that, I will now turn it over to Brad, who will provide more details on the fourth quarter financials and our outlook for fiscal 2027. Brad?

Thanks, Rich. Good morning, everyone. I want to start by recognizing the contributions from the Donaldson team over the past year. We delivered fourth quarter results ahead of expectations capping off a year filled with significant macro uncertainty, including from tariffs and conflict in the Middle East while also navigating a complicated execution environment, particularly in the industrial segment. Throughout the year, our teams had a clear focus on serving our customers and delivering results. So thank you to all of our employees for your hard work and for positioning us to build on our success in fiscal 2027.

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

Fourth quarter consolidated operating margin was 17.5%, an all-time high and up 110 basis points from the prior year. The sequential increase from third quarter of 90 basis points is important as it was driven by gross margin expansion, highlighting delivery on our promise of continued improvement in operating efficiency, particularly in our Industrial business. To that end, gross margin increased 190 basis points to 36.7%, an all-time company high reflecting favorability from volume, pricing and mix.

I want to also call out a couple of offsetting factors, specifically select input cost inflation, largely related to the conflict in the Middle East, as well as continued operational inefficiencies in power generation. Within power generation, demand remains strong, and we are still stabilizing operations at our plant in Mexico following a shift in production. Consequently, we realized about 40 basis points of gross margin pressure in the quarter. I'm encouraged by the progress made, including measurable improvements in throughput, delivery performance and execution. Given the current trajectory, we remain confident that we will fully recover by the middle of fiscal 2027.

Important to note is that the impact from footprint optimization was immaterial in the quarter as we continue to ramp productivity in the receiving facilities, and we are still on track to deliver annualized savings of about $10 million once we hit run rate productivity in the second half of fiscal 2027.

Now back to the P&L. Fourth quarter operating expense as a rate of sales was 19.1%, 80 basis points above the prior year. The higher rate was driven primarily by the addition of facet run rate expenses and amortization, and we also had higher incentive compensation that was partially offset by continued structural expense discipline.

Moving to segment profitability. Mobile Solutions pretax margin was a record 21.3% and above internal expectations and 220 basis points above prior year due to volume leverage, pricing and mix related to aftermarket sales strength. Industrial Solutions pretax margin was 16.4%, 450 basis points below prior year, pressured by the inclusion of facet run rate expenses and amortization, organic expense deleveraging and headwinds associated with power generation production shifts. On a sequential basis, industrial margin trended higher as expected, improving 300 basis points from the third quarter. We continue to expect margins to return to more normalized levels in the second half of fiscal 2027 as a result of sales leverage, margin recovery and power generation, and ramped up production following our plant closures in fiscal 2026. Life Sciences pretax margin was 11.9% and above internal expectations and up 660 basis points from prior year.

Volume leverage from our higher margin food and beverage and disk drive businesses, combined with continued expense discipline, drove the notable improvement. In summary, we have strong momentum in our base business, and we'll also have the incremental benefit of facet, giving us confidence we can generate another year of record performance in fiscal '27.

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

In Industrial Solutions, Total sales are forecast to grow mid-teens with approximately half the growth coming from the inclusion of facet. IFS sales are expected to increase mid-single digits with growth across all businesses including dust collection and power generation, where we continue to benefit from the super cycle and a robust order book through fiscal 2027 and into fiscal 2028. Aerospace and Defense sales are projected to increase over 50%, driven primarily by incremental facet sales. Organic aerospace and defense sales are forecast to increase mid-teens as we work to resolve supply chain issues and deliver on our elevated backlogs. In Life Sciences, we project sales to increase between 7% and 11%, driven by continued customer demand for our process filtration and disk drive solutions.

Moving down the P&L. We expect operating margin within a range of 16.6% to 17.2%. The midpoint of our range implies a 90 basis points improvement from prior year driven by gross margin expansion as we benefit from pricing, Facet's higher structural gross margin and improved operational efficiency. Operating expense as a rate of sales is forecast to partially offset gross margin favorability as a result of the full year impact of Facet run rate expenses as well as amortization of approximately $22 million. While the net impact of facet on our operating margin is expected to be immaterial this year, I do want to note that facet is accretive in terms of gross margin and operating profit dollars. To help with modeling, I also want to highlight a few things.

First, seasonality. We expect our sales and operating profit dollars to generally follow typical seasonality with the second half of the year accounting for the majority of both. As such, we're forecasting approximately 52% of the total sales and 57% of total operating profit in the second half. The second modeling item to highlight is interest expense. Fiscal '27 interest is expected to be between $55 million and $60 million compared with $36 million in the prior year, primarily as a result of interest on facet related debt. While we expect to pay down the facet debt over the course of the year, other factors in our interest expense plan result in a fairly even split across the quarters. All in, our EPS guidance for the full year is between $4.22 and $4.38, including approximately $0.12 of dilution from facet when considering incremental amortization and additional interest expense. The midpoint of this range represents another all-time high for Donaldson and an 8% increase from prior year.

Now on to our balance sheet and cash flow outlook. Our balance sheet is in great shape. We've already paid down over $100 million of facet related debt. Our leverage ratio is currently about 1.4x net debt to EBITDA. This gives us plenty of financial flexibility to allocate capital for the future. In terms of capital allocation, our priorities are unchanged. First, reinvest back into the company. Our R&D investments in strategically important high-growth high-margin areas allow us to maintain and expand our place as the leader in technology-led filtration and our investments in working capital and capital expenditures ensure we are operating efficiently today and building for tomorrow.

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

Our second capital deployment priority is disciplined M&A. We are actively pursuing opportunities that strengthen our portfolio and meet our strategic and financial criteria. While we invest for profitable growth, we're also returning cash to shareholders. Our third capital allocation priority is dividends. We consistently pay and increase our quarterly dividend, solidifying our place in the S&P High Yield Dividend Aristocrat Index. As of the end of calendar 2025, we've paid dividends for 70 years in a row, 280 quarters. and we've increased the dividend for 30 years in a row. That's a statistic we're very proud of, and we look to continue that trend. Share repurchase is our fourth capital deployment priority and our variable lever. After pausing our repurchasing activity following the Facet acquisition, we have now restarted our program and expect to purchase about 1% of shares outstanding this year, which will offset stock compensation dilution.

Before I turn it over to Rich, I want to reiterate how pleased I am with the way we finished fiscal 2026 and I look forward to carrying this momentum into fiscal 2027. Now I'll turn it over. Rich?

Thanks, Brad. Each day, Donaldson Company aims to grow and deliver customer value, extending our leadership position in technology-led filtration. We do this through innovative new solutions in every segment including ArmorSeal technology and mobile, Stratos Mist Collector in industrial and products such as our LifeTec high loading performance filter and HAMR-related disk drive technology and liquid cooling capabilities in life sciences. With the acquisition of facet, we expanded the addressable markets, which we can apply our capabilities to and our teams are already seeing cross-selling opportunities to capitalize on.

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

Every Donaldson employee safely home everyday. In closing, as I look ahead, I am excited about the opportunities for Donaldson Company as we continue to build upon success. I will now turn the call back to the operator to open the line for questions.

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

This is actually Stefan Diaz sitting in for Angel. Maybe just starting with margins. Obviously, there's some seasonality here in 4Q. The margins were a healthy 17.5%. As we look to fiscal 2027, is there any underlying operational headwinds we should be aware of, given the midpoint of the guide is closer to 70%?

Yes. As we enter F '27, and Brad will run you through the numbers in a little bit more detail. This is Rich. From an operational perspective, we'll start the year with continued pressure in our industrial business. We've talked about our power gen business and the first half pressure that comes from clearing on our facility in Mexico. So we'll see a meaningful step up in that business in the second half. Also, we are finishing the closure of the plants that we had initiated last year. So there'll be some volume improvements as the year goes on in that business.

But I would say, just in general, there's not a broad operational challenge. It's really a couple of acute issues and then our normal seasonality that we'll be looking at. And then Brad can expand on that further.

Yes. I think that normal seasonality is the important part. And we went through that a little bit in my remarks just to try to be clear for everybody, given that there is a back half profit tilts, about 57% of operating profit, landing in the second half. But I'd echo Rich's comments, it's really about execution in the industrial business as we go ahead. Otherwise, I think we're looking very positively at margin for the year. The one nuance I'd say is, again, back to our comments, we talked about gross margin expansion with a little bit of operating expense headwind as a function of assets. So something to keep in mind. The amortization just really want to put [indiscernible] on it $22 million of incremental amortization as a function of that transaction that should be modeled through and that will obviously [indiscernible] through the year. And then we get to fourth quarter of fiscal '27 where we compare again a normal quarter with facet given that it's -- we acquired at the beginning of this last quarter.

And then on Facet, so there was -- it was 6% dilutive here in 4Q and yet the fiscal '27 guidance only is about $0.12 for the full year. Are you like below that annualized rate. So what are the main drivers for this? Is it debt pay down, cost synergy, purchase accounting step down?

Yes. It's -- you've touched on 2 of the big ones. The purchase accounting step down and then debt paydown. So the amortization in the quarter was -- in the fourth quarter was more substantial than an annualized rate of $22 million. And that's a big part of it and then some debt pay down. So the thing that I want to underscore with Facet is on a cash basis, so I'm talking business performance, less interest expense in fiscal '27, Facet is accretive. And I think that's an important point to note.

Next question comes from the line of Quinn Fredrickson with Baird.

First one, Rich, just on the mid-teens organic growth guidance in Aerospace and Defense impact, what gives you confidence that supply chain issues will be resolved to enable that level of growth? And what is the timing we should be thinking about as to when those supply constraints are resolved?

Yes. When we look at the A&D business, our teams have been managing that situation very closely now for several months. And so we feel like we understand the issues intimately, the biggest challenge we have, frankly, going forward, is the closure of our California facility that we moved into a facility in Illinois. The good news is all of the closure costs associated with that for the most part are behind us. And so now it's really just ramping production in the new site. We have teams deployed to support them. They've got a good handle on the set of issues, and we see sort of, I call operational data every week that shows their improvements.

So if you think about it from a timing standpoint, it will take them the first half of the year to sort of chew through that late position and returned us to normalcy. When we think about our full year expectations for A&D, that is a big part of what we're expecting. The broader supply chain issues with our supply base, those are sort of transient acute issues. We feel like those are mostly under control. And we have folks managing proactively to monitor for new issues and try to head those off before they become significant headwinds. So all in all, it's a challenge, but we feel really good about our ability to sort of work through that through the fiscal year.

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

Yes. So if we keep it to the first-fit side in mobile, I'll just kind of walk you through all of the end markets. We are seeing pretty broad-based strength in mining and construction and we saw that acceleration really coming out of the holiday period last fiscal year through Q3 and Q4. That continues into next fiscal year, fiscal year '27 and it's pretty broad-based. We see it across all the regions, and we see it really throughout the vast majority of our customer base. The trucking recovery is materializing as expected. We've seen sharp upturns in truck build rates, specifically in the U.S., our expectation is that [indiscernible] through the rest of the calendar year and likely into the first part of next calendar year.

I think there's probably some uncertainty as we get into the second half of next calendar year and where this is going to go. But all signs are pointing to a nice recovery there, at least for now. And as you mentioned on ag, what we had been seeing previously was really pretty isolated green shoots we're starting to see a little bit more broad improvement in that market, albeit at a lower scale than the other markets. And I would say the range of outcomes across the product segments and the customer base is a little bit wider, but it's -- we're starting to see green shoots there in ag. And hopefully, that will continue to improve throughout the year.

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

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

So let's start with your Life Science question. Broadly, if you think about Life Sciences, the 2 largest businesses in that segment is our disk drive business and our process filtration business we're seeing really strong demand outlook on both sides. If you think about the disk drive business, it's really a combination of share in pricing the technology shift to HAMR, which is the next-generation technology that has significantly more content per drive for us. And then finally, it's really around continued volume growth.

So it's really a recipe of all 3 of those from what we see in our outlook, that has legs beyond fiscal year 2027, we would see this as having a steady growth trajectory for a little while, and we're really optimistic about the technology that we're bringing to that market and our ability to continue to hold and take share. The Food and Bev business process filtration is a combination of microelectronics and our historic Food and Bev. It's really a combination of new product releases and our team is just really executing well commercially. The microelectronics business is seeing some pretty strong tailwinds due to the data center AI build-out as well as what we're seeing in some of the liquid cooling inside that business.

But I would say the base business supporting pharma, Food and Bev continues to execute really well. So we have a lot of optimism around both of those businesses. And then on the Power Gen, and Brad can correct my numbers if I'm off a little bit here. But I think we're talking about 50% first fit, 50% aftermarket, roughly the first-fit side clearly is going very, very strong. So we're expanding the installed base pretty aggressively, and we'll continue to do that for quite some time. And then that's going to turn into additional aftermarket revenue as those replacement part filters kick in, in a couple of years. But overall, power gen, we're booked out for the better part of the fiscal year, and we see line of sight to fully loading our capacity through 2028.

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

Maybe following up on that Life Sciences question, how should we think about margins in this business going forward? Or maybe another way of asking is -- what should we expect for incremental margins in this business?

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

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

Yes, Adam, I would throw in maybe some of the other non-Power Gen IFS businesses. Clearly, does collection is the largest piece of that. But they're all trending in a pretty similar fashion. What we've seen and since we spoke last time, is an acceleration of orders through our fourth quarter. And I would say it's not to the same level we're seeing in some of our other end markets, but they are positive trends. And so -- the first half of last year, that business was pretty muted on the demand front, and we saw it start to improve and we've seen an acceleration of that in Q4. So I would say nondata center AI CapEx is improving. But certainly, we are not at the peak, and -- but we're encouraged. We're encouraged by the uptick and a lot of the pressure had been in the U.S. previously, and we're starting to see some of those quotes that we have been working on turn into orders. So good signals going into F '27, and we'll continue to monitor that and be agile as the year goes on.

Adam, this is Brad. I'll just underscore one point. An important part about this business is roughly half goes through recurring revenue, and that's been hanging in okay. Not growth to the extent that we've seen in the mobile solutions. But it is important to note that we've got this durable side that supports us when CapEx is a little bit softer, like Rich was saying.

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

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

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

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.